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Diana Shipping Inc. (NYSE:DSX)

Q4 2009 Earnings Call Transcript

February 23, 2010 9:00 am ET

Executives

Edward Nebb – IR Advisor

Simeon Palios – Chairman and CEO

Anastassis Margaronis – President

Andreas Michalopoulos – CFO and Treasurer

Ioannis Zafirakis – EVP and Secretary

Analysts

Jon Chappell – J.P. Morgan Chase

Gregory Lewis – Credit Suisse

Scott Burk – Oppenheimer & Company

Michael Weber – Deutsche Bank

Rob MacKenzie – FBR Capital Markets

Anders Rosenlund – ABG SC

Operator

Greetings, and welcome to the Diana Shipping, Incorporated 2009 year-end 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. It is now my pleasure to introduce your host

Edward Nebb, IR Advisor for Diana Shipping. Thank you, Mr. Nebb, you may begin.

Edward Nebb

Thanks, Rob. Greetings, everyone. This is Ed Nebb. I want to welcome you to the Diana Shipping, Inc 2009 fourth quarter and year-end conference call. The members of the Diana Shipping management team who are with us today include Mr. Simeon Palios, Chairman and Chief Executive Officer; Mr. Anastassis 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, which you can see in its entirety in the release we issued earlier today. Certain statements made during this conference call, which are not statements of historical fact are forward-looking statements and are made pursuant to the Safe Harbor Provisions of Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on assumptions, expectations, projections, intentions, and beliefs as to future events that may not prove to be accurate. For description of the risks, uncertainties, and other factors that may cause future events to differ materially for what is expressed or forecasted in our 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, Inc.

Simeon Palios

Thank you. Good morning, and thank you for joining us today. It has now been nearly five years since the IPO of Diana Shipping, Inc in March 2005. Since that time and in spite of the recent challenging and uncertain economic environment, we have consistently delivered profitable results each and every quarter. I'm proud to report that this was again the case for the fourth quarter and year 2009.

At the same time, we have maintained a staff focused on our strategy to create and enhance shareholder value. We have expanded our fleet, managed our time charter operations to produce the desired revenues, build relationships with high quality charterers, and to establish a strong balance sheet to support our growth and avoid the risk of excessive leverage.

One of the most significant events of recent months was the delivery in January 2010 of the Melite, a 2004-built Panamax dry bulk carrier of 76,136 tons deadweight, purchased at the price of $35.1 million. This was the first vessel purchase under our previously announced investment program, whereby we will take advantage of the growth opportunities presented during the low phase of the shipping cycle. We're excited about the potential for this program, which is designed to create shareholders' value through purchases of attractive-priced vessels during the next 18 to 24 months in accordance with our technical and age profile standards.

Now, I would like to point out some of the other highlights of our recent performance, then the members of our senior management team will review our market outlook and discuss the financial results in greater detail.

Net income was $27.6 million for the fourth quarter of 2009, and there – $121.5 million for the full year. Voyage and time charter revenues totaled $58.6 million for the fourth quarter of 2009 and $239.3 million for the full year. Our average daily time charter equivalent rate was 31,300 for the 2009 fourth quarter, which covers daily vessels operating expenses by about – of nearly five times.

We have continued to strengthen Diana's balance sheet. Our cash position increased to more than $282 million at the end of 2009 or nearly $220 million higher at the end of the prior year. At the same time, we have continued to operate with considerably less leverage than virtually any other company in our industry. Long term debt, current and non-current, at the end of 2009 was $281.5 million against stockholder equity of $999 million.

Our fleet employment strategy continued to balance consistency with opportunity. Approximately two-thirds of the fleet is chartered for periods arising from 2011 to 2015. We have continued to build relationships with top quality charterers. Through the 2009 fourth quarter and into early 2010, we entered into time charter contracts for the Houston with Shagang Shipping Company Limited, the Nirefs with Louis Dreyfus Commodities, the Erato with C Transport. The third is with Glencore Grain and the Melite with the J. Aron division of Goldman Sachs.

Looking at the conditions in our marketplace, we've continued to see a wide range of opportunities. While demand for the dry bulk capacity is expected to be reasonably strong during 2010, we believe that the actual deliveries of dry bulk vessels in the next two years will not be easily upload [ph] by the market. We believe that the impact of supply and demand forces on vessel prices will continue to provide many attractive opportunities to pursue our fleet investment strategy.

Going forward, we will seek to take advantage of our market opportunities in a disciplined manner as we have done with the purchase of the Melite. We will maintain our focus on generating a steady stream of revenues through features with high quality charterers. And we will continue our proven and prudent approach to Diana's capital structure.

With that, I will now turn the call over to our President, Stacey Margaronis. Thank you.

Anastassis Margaronis

Thank you, Simeon, and a warm welcome to all who have honored us by participating in this morning's conference call. Last year will go down in shipping history as one of the most volatile years in recent times. The bulk dry rate started the year at 773 points, to end it 3,005, having gone up 4,661 on the 19th of November last year. The question that is keeping most international economists and shipping analysts busy nowadays is, "Where do we go from here?"

The OECD increased its 2010 forecast for economic growth for the world's leading developed economies. The OECD 30 members are now predicted to grow 1.9% in 2010, compared to an anemic 0.7% growth forecast made back in June 2009. In 2011, the same organization expects growth to accelerate to 2.5% per annum. So with this relatively favorable climate in world economic activity, let us look at individual commodities and how they are expected to contribute to the absorption of an ever-increasing world bulk carrier fleet.

Starting with steel production, during 2009, global steel production held by 110 million tons or 8.5%. Chinese steel production increased by 67 million tons or 13.5%, while Chinese iron ore imports rose by a massive 183 million tons or 41% to reach 627 million tons. As a result, despite unprecedented polls and imports by the European Union and Japan, global (inaudible) trade in iron ore actually increased by approximately 70 million tons or 8%. This pattern was followed in several other trades, most notably coal.

We agree with Clarkson's and Howe Robinson that it is extremely difficult to judge just how robust and sustained the recovery in OECD production will be this year. The conservative estimates placed Japan and European Union to using steel at the levels seen during 2002. As regards to China, the conservative consensus view is that 2010 outlook will be broadly in line with the annualized rate of production seen during the second half of 2009. This was obvious to be a rather bearish outturn for China, and will mean a slowdown in economic activity. A more realistic forecast would be based on annual growth of steel production in the order of 8%, compared to the annualized figure of the second half of 2009. To conclude, most analysts predict that on average, steel production worldwide should increase during 2010 by 11%, compared to 2009, equivalent to 132 million tons.

Let's turn to iron ore demand. According to Clarkson's, their research study, underpinned by increases in steel production, world iron ore imports will probably increase by approximately 11% during 2010. This will mean that the just over 1 billion metric tons will be shipped worldwide, with China importing approximately 662 million metric tons during the same period. However, assuming iron ore shipments ran at system capacity with only a modest allowance for operational disruptions, there is a potential for the main iron ore trade to grow by some 15% in 2010.

How these substantial shipments will be distributed during the year will as usual depend on several factors, one of which is the contract pricing negotiations. There are hopes that the price might be agreed by April this year, and contract prices are certainly set for an increase following the 33% decline during 2009. Spot prices for iron ore are currently well above the benchmark contract price projecting that a 30% increase for 2010 can and should be expected. The miners are well aware of the fact that in 2009, Chinese steel mills have purchased approximately 60% of their requirements in the spot market. With spot prices well above the old contract prices, this will be used by miners to push for higher prices with greater chances of success.

Another factor which will affect shipment status during 2010 is the level of stock pilings. Present levels stand at around 70 million tons, with an average of 63% iron content. This will present around 30 days supply. Obviously, the larger the stock piles, the greater the flexibility Chinese buyers will have in timing their new shipments. It is possible that this might result in short term volatility in purchasing demand.

Turning to coking coal, Clarkson's is again forecasting reasonable increase in volumes to be shipped in 2010. The estimate stands at 215 million tons, which will present an increase of about 3%, compared to last year. It is noteworthy that India has reportedly started to place orders for Russian coking coal, as Australian coking coal is becoming less competitively priced and the volume of available coking coal in the spot market continues to tighten.

Total exports of thermal coal are estimated to reach 599 million tons during 2010, an increase of only 2% compared to 2009. Given behind these figures provided by Clarkson's is the fact that the average stocks of thermal coal at Chinese power plants is about nine days worth of supply as reported by Jefferies and confirmed by other shipping analysts. China's coal import needs have increased to such an extent that the country recently imported thermal coal for the first time from Colombia. If this trend were to continue, the ton-mile effect on demand will be profound.

Based upon all the above forecasts, Howe Robinson predicts that overall, coal exports in 2010 might easily increase by approximately 90 million tons requiring an extra 1,275 or so Panamax equivalent shipment, which in ton-mile adjusted terms will translate to an increase of trade of approximately 120 Panamax vessels.

Grain shipment, here the forecasts are rather disappointing. The Clarkson's (inaudible) net for 2010 grain exports expands at the total of approximately 228 million tons, which if true will represent a drop of 8% from the volumes shipped in 2009. Unfortunately, the USDA is also predicting a drop in shipments for the 2009-2010 season, however smaller at about 3%, compared to the previous year. This will reflect the unwinding of the exceptional strength seen in the wheat trades in 2008-2009, when in spite of the credit crunch, volumes rose from 116 million to 138 million metric tons providing much needed support to the Panamax market during the first half of 2009.

Chinese coastal trade, these shipments, which have been growing in importance recently, took a hit in 2009 with volumes dropping by 49 million tons mainly due to the drop in the coastal trade of coal. Towards the end of 2009, there were signs of an increasing coastal shipment, and Howe Robinson expects an increase in 2010 in the coastal shipments of both coal and iron ore as to the recent availability of these products from international suppliers revitalizes demand for the local products. Howe's projections approached the June 2007 all-time high during the fourth quarter of 2009.

Congestion in China increased to nearly 10 days waiting due to the high delivery volumes. Maersk Broker has estimated – estimating 173 Panamax and Capesize bulkers waiting at temperatures outside the main coal and iron ore port of Australia. According to Clarkson's, port congestion is expected to increase during 2010, and export-import port in Brazil and elsewhere will attempt to reach 2008 export volumes. Estimates vary, and some say that as much as 5% of the world fleet could be tied up in congested ports around the world during 2010. Congestion will continue to dominate the short term imbalance between supply and demand, thus creating price volatility during the year.

So it is important to start addressing the question of supply and demand balance going forward without taking a view on future scrapings. During 2009, Clarkson's have counted approximately 10 million tons of deadweight of bulk carriers, which was trapped. Maersk Broker placed that number at approximately 12.2 million deadweight tons. Whatever the actual number, scrapping was not spread evenly during the year. After a very active three quarters, scrapping dropped dramatically during the fourth quarter of last year when a near 1.2 million tons deadweight of bulkers were trapped. This was the result of the strength in the trade market, something that must be kept in mind when making forecasts for scrapping during 2010. According to Clarkson's, so far this year, a near 600,000 tons deadweight have been scrapped. The close up number includes one Capesize bulker and no Panamax bulk carriers.

Turning to the new building order book, during 2009, the bulk of 1.5 million deadweight tons of bulkers were actually delivered from an order of over 70 million deadweight tons. As of January this year, the Capesize order books stood at 144 million deadweight tons, representing 83.7% of the fleet. From this total, 51.6 million deadweight tons are scheduled for delivery in 2010, and the further 45.6 million deadweight tons in 2011.

As regards Panamax, the order book consists of 58.7 million deadweight tons, about 49% of the existing fleet. From this total, about 23.2 million deadweight tons are scheduled for delivery in 2010, and a similar number in 2011.

Looking more closely to what analysts expect will happen in the new building fund during 2010, the fortune [ph] of use to those expected by Howe Robinson is their recently issued dry cargo market report. More specifically, their low case delivery scenario places the attrition rate, as they call it for new building rate, at 45% of the total order book and 40% for the Panamax. For smaller bulkers, the attrition rate goes up to as much as 54%, hitting an overall average attrition of about 50%.

On the basis of these assumptions, the bulk carrier fleet should see a gross expansion during 2010 of between 13% and 15%. As expected, the greater pressure will be felt in the Capesize sector, which will face deliveries of between 18% and 21% of the existing fleet, with Panamax seeing deliveries of between 11% and 12.5% of the existing Panamax fleet. The Handymax, Handysize aggregated total works out to around 11%.

Assuming that Cape carry about six-and-a-half times their deadweight in any 12-month period, Panamax around seven-and-a-half times, and Handy's around eight-and-a-half times, Howe Robinson reaches that a total volume number of additional carrying capacity of approximately 416 million metric tons, excluding scrapings. To reach this figure, Howe Robinson has made adjustments to take into account the effects of the fast expansion of the VLOC fleet for both new buildings and conversions.

Let us go back to scrapping projections for 2010. In the absence of a sharp contraction in freight trade, Howe Robinson would look for scrapping to run at levels, which would effectively eliminate the fleet, which is currently over 25 years old in the next three years. If scrapping increases by about 10 million deadweight tons from 2009, which is by no means a certainty, this would result in an offset of less than 5% of the overall fleet, and the effect Cape fleet will be less than 2% in 2010, due to the young profile of the fleet.

Therefore, unless there is a sharp drop in earnings during the year, the overall net fleet range estimates range from 8.22% to 10.5%. But as expected, there are significant variations between vessel classes. The range estimates for net Cape fleet growth is between 16% and 19%, while for Panamax, it is between 5.9% and 7.5%.

So if the above assumptions are realistic, the only factor left to save the day is congestion. According to Howe Robinson, the effect of congestion during 2010 to be broadly neutral, compared to 2009. Even if congestion increases more than anticipated, it is highly unlikely that the overall supply will be reduced sufficiently to be absorbed by the additional demand mentioned below.

The optimistic supply side scenario we will be reporting now comes from J.P. Morgan. The assumptions made are, first, 50% of the 2010 scheduled deliveries will not hit the bottom this year. Secondly, to the 61.2 million deadweight tons, which will actually be delivered in 2010, we add another 2.5 million deadweight tons of conversions. It's worth noting this year that the single owner recently converted the containership new building order into bulk carriers amounting to approximately 540,000 deadweight tons. Thirdly, from this total of 63.7 deadweight tons, J.P. Morgan deducts 15.7 million deadweight tons of bulkers, which they hope will be scrapped during the year due to age-related factors. A limited statistics available for the year thus far denotes a forecast of high rate of scrapping for 2010, without a dramatic fall in earnings over the next three quarters. Finally, J.P. Morgan forecasts that 21.1 million deadweight tons or approximately 5% of the world fleet will be removed from the fleet through congestion.

If this assumption is realized, the freight market should remain relatively firm, which will in turn, unfortunately, affect scrapping. If all the above assumptions hold, dry bulk supply will increase by only 26.8 million deadweight tons or 5.5% of the fleet. This figure, when set against a ton-mile adjusted dry bulk demand increase for 2010 of around 5.6% as predicted by Clarkson's and Howe Robinson bodes well for the future strength of the freight market. It should be mentioned that J.P. Morgan offers a more conservative 3.2% ton-mile adjusted increase in demand for this year.

If the estimated net of scrapping increase of annual cargo carrying capacity of approximately 320 million deadweight tons materializes this year, then the 230 million tons of additional dry bulk cargo demand for 2010 predicted by most shipping analysts will create severe pressure on rates, particularly, during the second half of the year. This could look even worse if the different size sectors figure that they can do account as well with Cape sharing the lion's share of the 2010 fleet increase as explained earlier on. If we look further out into the future, demand, scrapping, and congestion will have to increase even more dramatically then in 2010 to absorb an estimated 14% net increase of the bulk carrier fleet estimated for 2011.

Before wrapping up this description of the state of the dry bulk shipping market, we should point out the most important demand sized risks looming in the horizon, that is a double deep recession or extremely anemic world economic recovery. This will be determined by the scale of the sovereign debt problems, as recently shown by the Greek government's debt situation, and the way in which central banks and finance ministers around the world coordinate the withdrawal of monetary and fiscal policy stimuli. If either of these all important policies develop in a negative way for world economic growth, then the demand increases we have assumed there along will not materialize, and the freight markets will sink deeper into recession and take longer to recover and would otherwise be the case.

As mentioned by our Chairman and CEO in his opening remarks, the management team at Diana Shipping has already commenced implementing the investment program in bulkers mentioned on several occasions in the past. We believe this investment strategy will allow the company to grow in an orderly manner, with relatively low levels of debt and reach a desired target by the end of next year. This, combined with the chartering policy we have applied since the company public to help us the maximize the risk-adjusted return to our shareholders' equity.

At this point, I will hand over the call to our CFO, Andreas Michalopoulos, who will provide you with the company's 2009 yearly and fourth quarterly financials. Thank you.

Andreas Michalopoulos

Thank you, Stacey, and good morning. I'm pleased to be discussing today to you Diana's operation results for the fourth quarter and year ended December 31st, 2009. Fourth quarter 2009, net income for the fourth quarter of 2009 amounted to $27.6 million, and the earnings per share of Diana Shipping amounted to $0.34. Volumes in time charter revenues decreased to $58.6 million, compared to $84.3 million in 2008. The decrease is attributable to decreased average hire rates. The decrease in voyage and time charter revenues was partly offset by the revenue earned by motor vessel Houston, which was delivered in October 2009.

Ownership days were 1,813 for the fourth quarter of 2009, compared to 1,748 for 2008. This utilization was 98.9% in the fourth quarter of '09 and 98.6% in 2008. The daily time charter equivalent rate for the fourth quarter of 2009 was $31,003, compared to $45,824 for 2008.

Voyage expenses were 2.9 million for the quarter. Operating expenses amounted to $11.3 million and increased by 14%. The increase is attributable to the addition of motor vessel Houston in the fleet in October 2009, and to increases in old cost factories about the effect of decreased insurance costs. Daily operating expenses were $6,238 for the fourth quarter of 2009, compared to $5,675 in 2008.

Depreciation and amortization of deferred charges amounted to $11.7 million for the fourth quarter of 2009. General and administrative expenses increased by $1.7 million or 55% for the fourth quarter 2009 to $4.8 million, compared to $3.1 million in 2008. The increase is mainly attributable to increased gas (inaudible) and competition costs from the this liquid stock. Interest and finance costs decreased to $0.9 million for the quarter, compared $1.5 million in 2008 due to lower average interest rates.

For the year ended December 31st, 2009, compared to the year ended December 31st, 2008 now, net income amounted to $121.5 million, and earnings per share to $1.55 million. Voyages and time charter revenues decreased to $239.3 million in the year ended December 31st, 2009, compared to $337.4 million in 2008. The decrease is attributable to decreased average hire rate and increase of hire and write off days in 2009, compared to 2008.

Ownership days was 7,000 for 2009, compared to 6,913 for 2008. And operating days was 6,857 in 2009, compared to 6,862 in 2008. The increase in ownership days resulted from the acquisitions of motor vessel Houston in October 2009, and the decrease in operating days were due to increase of hire and dry bulk days.

Fleet utilization was 98.9% for 2009 and 99.6% for 2008. The daily time charter equivalent rate for 2009 was $32,811, compared to $46,777 for 2008. Voyage expenses amounted to $12 million. Operating expenses amounted to $41.4 million, compared to $39.9 million in the same period of 2008. The increase is attributable to the addition of motor vessel Houston in the fleet, and increased costs in store spares and repair.

Daily operating expenses were $5,910 in 2009, compared to $5,772 in 2008, representing an increase of 2%. Depreciation and amortization of deferred charges for 2009 amounted to $44.7 million. General and administrative expenses for 2009 increased by $3.7 million or 27% to $17.5 million, compared to $13.8 million in 2008. About 76% of this increase is attributable to increased non-cash compensation costs on restrictive stock awards and 13% of the increase to cash flow losses. Interests and finance cost in 2009 decreased to $3.3 million, compared to $5.9 million in 2008, due to decreased average interest rates.

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

Question-and-Answer Session

Operator

Thank you. We’ll now be conducting the question and answer session. (Operator Instructions) One moment please while we poll for questions. Thank you. Our fist question is from the line of Jon Chappell with J.P. Morgan Chase. Please go ahead with your question.

Jon Chappell – J.P. Morgan Chase

Thank you. Good afternoon, guys.

Simeon Palios

Hi.

Anastassis Margaronis

Hi, Jon.

Jon Chappell – J.P. Morgan Chase

My first question has to do with the thought process behind the investment in the containership business. I know that wasn’t addressed in the prepared remarks and this probably isn’t the time to talk about the supply and demand of containers. But can you just talk about the returns that you foresee at this point of the cycle, and if these asset prices in container's relative to what you’re seeing in your core dry bulk fleet?

Simeon Palios

Thank for your question. We are in the process of closing it. We cannot go into details because it is a private transaction.

Jon Chappell – J.P. Morgan Chase

Okay. I’m not sure if you can answer this then, but can you explain this a little bit, the management role in this new venture from the current management team in Diana?

Simeon Palios

Well at this point, we cannot disclose anything further than that.

Jon Chappell – J.P. Morgan Chase

Okay. If I can move on then to the dry bulk side, after Stacey’s uplifting view on the market, how much further do you think asset prices can go down if the environment plays out that you’re expecting? Do you think that we’ve passed the bottom or can asset prices go below the trough that we saw about 12 months ago?

Simeon Palios

Well, I think that the save and purchase market is directly governed by the freight market. So if the freight market has to be depressed, then the values have to be depressed also.

Jon Chappell – J.P. Morgan Chase

And when you think about the freight market, would you think about the next six quarters? Do you think that the first half of this year might be a little bit stronger than this pressure that you foresee with the over capacity will really be a second half of 2010 story, and maybe the first half of 2011?

Simeon Palios

Well, I think that Stacey was very explicit to give you a number of assumptions, which we are making. It depends entirely to whether the assumptions or the analysts, and everybody concerned have the right assumptions or the wrong assumptions. So it’s almost impossible to predict.

Jon Chappell – J.P. Morgan Chase

Okay. And then finally, I know that you want to pursue a growth strategy, but if you have – if the prices were to fall significantly and if you compare where you think that they may go relative to where you purchased assets over the last few years, would it make sense to sell at current prices, which may be far more robust than what you can buyback at in the future?

Simeon Palios

Not really because we have so much cash available to do our scheme that we don't need to sell vessels to buy ships. So we will be waiting when the market really moves up to try and sell the older units. Not now.

Jon Chappell – J.P. Morgan Chase

Okay. Thanks very much, Simeon.

Simeon Palios

Thank you.

Operator

Thank you. Our next question is from the line of Gregory Lewis with Credit Suisse. Please go ahead with your question.

Gregory Lewis – Credit Suisse

Yes. Thank you, and good afternoon. Stacey, when we look at the outlook for employment of the fleet, it looks like there're three vessels that are going to be coming off charter over the next one to two, to three months. And it looks like all these vessels are – have had rates below market so we can expect them to get delivered probably towards the end of their re-delivery date. As you look at employing these vessels, does the strategy remain where we’re just going to look at where the time charter market is fixed? At a certain point if in the event that there's not really best in the time charter market, would you let those vessels float on spot?

Ioannis Zafirakis

Greg, this is Ioannis. How are you doing?

Gregory Lewis – Credit Suisse

Good. Good.

Ioannis Zafirakis

Greg, as we have said in the past, we have to keep consistent to be consistent with our portfolio abroad. Every time we have to fix a vessel, we have to see where this vessel is about to be – to re-open for re-chartering based on the total fixer of fleet. So you understand that we cannot say that today we’re going to go spot or we‘re going to go for two or three years. It depends on the time we are going to fix a vessel each time. We will place it accordingly in the portfolio of the total number of vessels that we have. If we do what you say, and spot the three of them, then it’s like taking a position that the market is going to get better after these charters are going to finish. It’s something that we don't want to do. We are in a fortunate position to be able to have a certain strategy in our chartering policy [ph], and this is what we do.

Gregory Lewis – Credit Suisse

Okay. Great. So then when you think about the portfolio, do you have a target or duration for the portfolio, or is that something that you don't really think about?

Ioannis Zafirakis

Basically, we want to have a vessel to charter as often as possible in order to get the average of the market at least.

Gregory Lewis – Credit Suisse

Okay. Great. And then my last question would be related to the SG&A expense. It looks like it spiked up a few hundred thousand dollars in Q4 versus Q3. Was that related to the containership – work around the containership joint venture?

Andreas Michalopoulos

No. Actually, not really. It’s a mix of things for the SG&A. The bulk of it is the compensation committee decision to have some consultation talks awarded to the company staff. And that’s the major bulk of this SG&A spike in the fourth quarter.

Gregory Lewis – Credit Suisse

Okay, Andreas. And related to that, and I don't know if you can talk about that either, but when you think about SG&A related to the containership joint venture, should we anticipate that being maybe a few hundred thousand dollars in Q1?

Andreas Michalopoulos

This will be basically, according to the percentage that Diana Shipping Inc will have in this new company. So you should budget accordingly. Of course, we will pay with the SG&A that are according to the percentage that we have. Yes, you should budget that.

Gregory Lewis – Credit Suisse

Okay.

Andreas Michalopoulos

We can't go further into more details, but this – well be aware of that soon as this thing materializes.

Gregory Lewis – Credit Suisse

Okay. Great. Thank you very much.

Andreas Michalopoulos

You’re welcome.

Operator

Our next question is from the line of Scott Burk with Oppenheimer & Company. Please go ahead with your question, sir.

Scott Burk – Oppenheimer & Company

Hi. Good afternoon, guys.

Andreas Michalopoulos

Hi, Scott.

Scott Burk – Oppenheimer & Company

I wanted to ask you a question about your total capacity for acquisitions. Obviously, we know about the cash in your balance sheet. But when you look at the cash we expected to generate and the debt availability that you have, what’s your total capacity for acquisition?

Andreas Michalopoulos

Well, actually at the moment, at the end of the year as you can see, we have an excess of $280 million on our balance sheet in cash. Now, we have financed the new motor vessel Melite that we have bought at the beginning at the year. That was delivered at the beginning of the year, 100% with our revolving credit facility from RBS. Remaining from this revolving credit facility is therefore, after this finance, $50 million. Taking into account the fact that the mortgaged vessels are only 11 out of the fleet on this facility.

Now, having said that, we have two loans, one with Bremer Landesbank, for motor vessel Houston that was drawn down $40 million, and another one with Deutsche Bank that we intend to draw down from motor vessel New York of another $40 million. So what we foresee as a capacity is from $500 million to $700 million in acquisition capacity.

Scott Burk – Oppenheimer & Company

Okay that’s a – yes, that’s from what’s where I’m coming in. Then you have cash on top of that. So do you think that – you talked about doing (inaudible) nine, acquiring nine vessels. It seems like there may be more – potential to buy even more than that, that's what I’m getting at?

Anastassis Margaronis

Of course, of course. There are most probably – not most probably as surely more than nine vessels. We don't give a figure. We prefer not to give a figure because you understand that will be according to the good average that we will have around the bottom of that market acquiring vessels over the next 24 months as we’ve said in a steady and diligent way around what we feel is going to be the lowest end of the market. So for sure, putting a number would be wrong because it depends on many things, size, type of vessels, price – second key prices at that time, chartering market, et cetera, et cetera.

Scott Burk – Oppenheimer & Company

Okay, okay. And then, I want to shift gears and ask you about – a lot of headlines recently about the problems with the – the government debt problems in Greece, the government debt, whatever. I just wanted to ask you, is there any impact on Diana’s operations either in terms of revenue, costs or loan availability? And what kind of impact might that have on Diana?

Andreas Michalopoulos

No. The operation here has very little to do with the Greek government and its finances. We do not rely on any financing change locally for any appreciable expense, nor do we foresee the tax situation to change imminently affecting our operations from Greece. So all in all, well the only effect that we see the Greek government debt situation having on shipping is essentially what we mentioned earlier, the general approach and view of investors towards the government debt. If that generally deteriorates, obviously, it’s going to affect growth, and true growth will affect the demands for the transportation of commodities of all kinds, including raw materials. So that is the indirect effect that we can see the Greek government debt problems having on our operations and nothing more for the time being.

Scott Burk – Oppenheimer & Company

Okay. And Stacey, I guess one more for you, just say – you talked about a lot of the broker outlook and what nots for the supply and demand? I was just wondering in the last month or two, it seems there have been a shift towards sentiments that Chinese – with Chinese government tightening financing that there may be a slowdown in demand in China. I was just wondering if you guys are seeing anything specifically with your ships where there’s been a decreased level of shipments to China or near term impact from that tightening.

Anastassis Margaronis

For the time being, we haven't seen anything, which is at least capable of being ascribed to such tightening. Our feeling is that any effects on tightening will initially hit the domestic market. And the spillover effects on international shipping trade will be – will take a bit longer to develop if the tightening prevails or increases for the next few quarters. So for the time being, we haven't seen many effects.

Scott Burk – Oppenheimer & Company

Okay. Thank you very much.

Anastassis Margaronis

You’re welcome.

Operator

(Operator Instructions) The next question is from Michael Weber with Deutsche Bank. Please go ahead with your question.

Michael Weber – Deutsche Bank

Hi. Good morning, guys. How are you?

Anastassis Margaronis

Hi. How are you?

Michael Weber – Deutsche Bank

Good. Just a handful of questions I have on your acquisition strategy, obviously, you guys are looking to average down to over about two years. How exactly do you think current asset values? And is there one specific asset value that you might see better value over the near term?

Simeon Palios

Well I do want to speak to what we know, namely the Panamax, the Capes, and perhaps we could go to the (inaudible) and the Capes, to the 210,000 tons.

Michael Weber – Deutsche Bank

Interesting. With regards to the Panamax, everything near term, would you consider buying one that was a little bit more expensive than the Melite or are you looking to average down from there?

Simeon Palios

Yes. Yes, because it fits our requirement and the strategy, which we have in mind, yes.

Michael Weber – Deutsche Bank

Okay. So you would buy one potentially that made more sense?

Andreas Michalopoulos

We would if we have to.

Michael Weber – Deutsche Bank

Okay. Looking at the potential to lever up, and you guys mentioned that you guys have nine vessels that are unencumbered right now. When you've had conversations around potential financing, would you look to mortgage all of those vessels? Would you look to leave some of them, send them off for this facility? And I guess, what kind of financing is available for you right now?

Anastassis Margaronis

This will be done in a steady manner to mortgage the vessels, you understand that? As we’ve said in the past, if banks are there to lend to somebody, they're there to lend to Diana Shipping because of the strategy that we have followed because of our balance sheet and because of our basically operational reputation. So yes, banks are here to lend. The best example is actually the m/v Houston that was – that we took a brand new facility for that project with a German bank named Bremer Landesbank. The other example is the motor vessel New York that we are about to get delivery of, whereby we also have a brand new facility in place, which we're going to activate as soon as we get delivery. So yes, banks are there. And yes, our intent is to use, as we've said in Scott Burk’s question, our fire power to basically have our strategy be implemented that these are the acquisitions along the next 24 months.

Andreas Michalopoulos

For the time being, we feel that the most efficient way to finance our positions is on a singular vessel basis because revolving credit facilities, as you probably are aware, are not offered either at all or by no means at competitive terms. We are not looking for anything as large as that for the time being, but we’ll take advantage of a debt as it is offered on the most competitive terms. For the time being, this is the source of debt that we have tapped, and we feel there is more there to be offered to our company on a ship-by-ship basis.

Michael Weber – Deutsche Bank

Okay. Now, that’s helpful. With regards to New York, I think within our lease and (inaudible) it can be delivered as late as second quarter. Do you have any more specific color on when you would anticipate that being delivered in maybe a month or around the back end of the quarter?

Simeon Palios

Yes. The vessels had successful trials about a week ago. There was no problem whatsoever on the ship. And at the moment, she is getting ready to be delivered the first week of March, which is next month. And of course, simultaneously, she will be delivered with the charterer in waiting.

Michael Weber – Deutsche Bank

Okay. That’s really helpful. And finally, I know you guys take the portfolio approach and might have diversified the charters you got on your fleet. When you look at the longer periods charters, how liquid is that market right now, specifically within the three to maybe in five years? And then when you look at to your case, is there business being done in this markets right now? At what kind of discount would you (inaudible)?

Simeon Palios

Well, today you can charter a vessel like a Cape of approximately $180,000 for three months – for three years. The rate, which you can achieve, provided, of course, it’s fairly early delivery, you can get approximately $30,000 daily, which is not a bad rate.

Michael Webber – Deutsche Bank

You think there’s any activity longer than three years, anything in the four to five years?

Simeon Palios

Yes, you can go longer than that, but maybe you have to reduce slightly the rate.

Michael Webber – Deutsche Bank

That is all I have. Thanks for (inaudible).

Simeon Palios

Thank you.

Operator

Thank you. Our next question is coming from the line of Rob MacKenzie with FBR Capital Markets. Please go ahead with your question, sir.

Rob MacKenzie – FBR Capital Markets

Good afternoon.

Simeon Palios

Good afternoon.

Andreas Michalopoulos

Hi.

Rob MacKenzie – FBR Capital Markets

I guess the last question I have last – one or two is you guys have historically gone with a ship-to-ship strategy among your – particularly among your Panas and I guess also among most of your Capes trying to standardize and keep down costs. How do you think about managing that approach to cost management through an acquisition strategy, which necessarily seems to entail buying runoff ships as they present themselves with attractive values?

Simeon Palios

Well, bear in mind that most of the machinery of the Panamax, whether they are built in Jiangnan or in Hyundai, or in any other major ship builder, are the same. So we have no engines, main engines have apart from (inaudible), all of them are the same. Maybe the size is bigger, but that’s all. The auxiliary engines and the generators are the same, and the main engines are the same. So it’s not very much difference even if they are not called sister ships.

Rob MacKenzie – FBR Capital Markets

Okay, that’s helpful. And as a follow up to that, you guys have stated you desire to consistently buy over a multi-quarter period here, do you see the possibility of seeing a handful of ships come in at one or more opportunities as opposed to runoff acquisitions here and there?

Andreas Michalopoulos

Yes, there is a possibility that they will see a large number of ships similar or dissimilar offering themselves for sale and for us to purchase. We will try and avoid the temptation to buy too many ships at once so as not to ruin the averaging process that we have set that they need to follow until the end of 2011 to the early 2012. So the answer is – to your question is that, yes, we might be buying more than one ship. It’s unlikely we will be buying, let’s say, more than five ships in one time, so very unlikely.

Rob MacKenzie – FBR Capital Markets

Okay. Thanks. And I’d like to go back I guess to Stacey's introduction in terms of the macro environment according to different broker estimates, I wonder, Stacey, if you could give us a color – a little more color, which side of the spectrum you lean on and what would – what events do you think might cause your expectations to vary from what you currently think?

Anastassis Margaronis

For the main events, first of all, we lean towards the predictions offered by Howe Robinson on their assumptions, which I think needs a bit more time maybe in presenting, which in other words, shows an over challenging effect towards the end of this year, early next in the Capesize sector, and not so bad in the Panamax. And we believe that puts great pressure on rates, unless we have demands increasing by more than anticipated. In other words, more than 120 million or so extra million tons of cargo.

Now, what could go wrong, as mentioned again, the double deep scenario as far as world economic growth is concerned would certainly ruin the predictions and make them even worse, and even anemic growth worldwide is going to be harmful to the freight market. So those are our main concerns on the demand side.

Rob MacKenzie – FBR Capital Markets

Okay. Thanks, I’ll turn it back.

Operator

Thank you. Our last question is coming from the line of Anders Rosenlund with ABG SC. Please go ahead with your question.

Anders Rosenlund – ABG SC

Thank for taking my question. My first question is regarding the operating expenses, which are (inaudible) earnings about $8,000 a day. Could you give us some guidance or indication where you think that operating expense be going forward, preferably on the Capes and Panamax?

Andreas Michalopoulos

Yes, hi, this is Andreas. The daily operating expenses for the year was – were as you mentioned, $5,110. And they were split evenly between Capes and Panamax. That is the same number basically that came out between Capes and Panamax. Next year, we would foresee the usual increase of about 3% to 4% evenly against for Capes and Panamax. That’s what I would budget if I were you. You must take into account the tax that – though between the quarters you have differences in the daily operating expenses mainly due to the crew, that gets – it increases either the – typically during the third quarter, but sometimes during the fourth quarter, and this is retroactively for the year. So you must take yearly figures when you make – when you put them in your models, and check when the increases come more or less.

Anders Rosenlund – ABG SC

Excellent. I have a follow up as well. What do you think about the Cape and Panamax spread going forward?

Andreas Michalopoulos

I would foresee that it will remain evenly spread for the simple reason that Panamax are typically slightly older vessels for the moment at least. And therefore, that’s why they are – the costs are evenly spread between Panamax and Capes mainly because Panamax are basically slightly older.

Anders Rosenlund – ABG SC

But in terms of these equivalent spot rates development, the market spread one–?

Andreas Michalopoulos

Are you talking about charter rates?

Anders Rosenlund – ABG SC

Yes, sorry.

Simeon Palios

Well, the fall easy routes to date for the Capes are standing at $32,500 a day, the Panamax are standing at $25,800 a day. It was this huge. Andres, would you like to – when we have the market that's going down, the spread is getting smaller and smaller. And if we reach the level where we have depressed charter rates, then there may not even be any kind of spread there.

Andreas Michalopoulos

Especially, if you take into account the rates of the new building deliveries during 2010 on Panamax and Capes.

Anders Rosenlund – ABG SC

Yes. I see. I totally agree with you. But your comment about the investing potentially in even larger vessels, how does that compare with–?

Simeon Palios

You see, Anders, that has nothing to do with the revenue of those vessels about flat. This is going to be through marketplace. It’s going to do with the revenues of the vessel in the future and the values of our vessel. The bigger the vessel, the more volatile it is in the price and the charter rate, so you are aiming for the future of that. It has nothing to do with the revenues. We are in the fortunate position to have revenues from the other vessels.

Anders Rosenlund – ABG SC

Okay. That answered my question. Excellent. Thank you very much.

Simeon Palios

Thank you.

Andreas Michalopoulos

Welcome.

Operator

Thank you. At this time, I would like to turn the floor back over to Mr. Palios for closing comments.

Simeon Palios

So thank you again for your interest in and support of Diana Shipping. We are committed to actively pursuing opportunities to enhance shareholder value through our strategies in the coming year. And we look forward to speaking with you in the months ahead. Thank you.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: Diana Shipping Inc. Q4 2009 Earnings Call Transcript
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