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Executives

Edward Nebb - IR

Simeon Palios - Chairman and CEO

Anastasios Margaronis - President

Andreas Michalopoulos - CFO

Ioannis Zafirakis - EVP

Analysts

Justin Yagerman - Deutsche Bank

Gregory Lewis - Credit Suisse Group

Michael Webber - Wells Fargo

Natasha Boyden - Cantor Fitzgerald

Fotis Giannakoulis - Morgan Stanley

Tatiana - Lazard

Diana Shipping (DSX) Q3 2010 Earnings Call November 15, 2010 9:00 AM ET

Operator

Greetings and welcome to the Diana Shipping 2010 third quarter conference call. [Operator instructions.] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Edward Nebb, investor relations advisor for Diana Shipping. Thank you Mr. Nebb. You may begin.

Edward Nebb

Thanks operator, and greetings to everyone I want to welcome you to the Diana Shipping Inc. 2010 third quarter 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. Anastasios 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 today's news release. 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 the 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 a description of the risks, uncertainties, and other factors that may cause future results to differ materially from what is expressed or forecast in forward-looking statements, please refer to the company’s filings with the Securities and Exchange Commission.

And now with that, let me turn the call over to Mr. Simeon Palios, chairman and chief executive officer.

Simeon Palios

Good morning and thank you for joining us today. It is my pleasure to report that during the 2010 third quarter and the year-to-date, Diana Shipping has made significant strategic progress. We have continued our focused and determined growth strategy of acquiring additional vessels to expand the company's revenue-generating capacity. We have maintained relationships with high quality charters and helped ensure the continuing [inaudible] of our fleet with reliable partners, and we entered into a milestone loan agreement with the Export-Import Bank of China that has significantly broadened the financial resources available to support our future growth.

I will review each of these important developments in further detail in a few moments, but first I would like to point out several highlights of our recent financial results. Net income was $33.8 million for the third quarter of 2010. Voyage and time charter revenues grew to $71.6 million, largely due to fleet expansion. Our average daily time charter equivalent rate was $31,593 for the 2010 third quarter, which covers daily vessel operating expenses by a factor of nearly 5.3 times.

Once again, we have maintained a healthy balance sheet, which is reflected in our cash position of over $311 million as of September 30, 2010. Also, the company's long-term debt, including the current quarter, was $344.6 million at the end of the third quarter, compared with a stockholders' equity of $1.1 billion.

Throughout 2010, we have maintained our commitment to grow Diana's revenue generation capacity through our fleet expansion strategy. During this week we expect to take delivery of a Post-Panamax dry bulk carrier of 93,193 dw to be named "Alcmene." This vessel already has been chartered to carry international [inaudible] at a gross charter rate of $20,250 per day of a period of about 23-25 months.

The Alcmene will join several other vessels that we have added to the fleet in the past year. This includes the Melite and New York, which were delivered in the first quarter of 2010 and two new Newcastle Max new buildings for which the delivery is anticipated in 2012.

We remain focused on this strategy of expanding our fleet in a discipline and cost-effective manner, which we believe will position the company well for future opportunities. As we have noted in the past, we plan to continue this process over the next 12 to 18 months in order to build our capacity to generate consistent revenues and drive increasing shareholder value.

In addition, consistent with our longstanding practices, we have cultivated a relationship with high-quality charters. For example, in addition to chartering the Alcmene to Cargill International, we also announced the direct continuation of our time charter agreement with Cargill for the Calipso. Also, during the third quarter we announced charters for the Naias with J. Aron, the Goldman Sachs affiliate, and for the Oceanis, with Sinochart. Last week, we announced a charter contract for the Triton with Resources Marine, a guaranteed nominee of Macquarie Bank Limited.

Now I would like to spend a few moments highlighting the announcement which we made last month for a 10-year term loan agreement in which the Export-Import Bank of China has a majority interest and DNB NOR Bank ASA as agent. This $82.6 million [inaudible] will be used to partially finance after delivery the acquisition of the two new building dry bulk carriers that I mentioned earlier.

We believe that the true significance of this agreement extends well beyond this specific transaction. This agreement establishes a long-term relationship between Diana Shipping and China Eximbank, thus expanding our access to a major source of cost-effective financing that is focused on opportunities in the shipping sector. The Chinese prime minster, Mr. Wen Jiabao, was present at the signing of this agreement, which we believe demonstrates the support that this agreement enjoys at the highest level of the government.

In closing, we are continuing to focus on delivering shareholder value by pursuing our strategy to grow the company's long-term earnings generating capacity through fleet expansion while also managing our business prudently and maintaining the financial flexibility to take advantage of attractive opportunities.

With that, I will now turn the call over to our president, Stacy Margaronis, for a perspective on industry conditions. We will then be followed by our chief financial officer Andreas Michalopoulos, who will provide a financial overview. Thank you.

Anastasios Margaronis

Thank you Simeon, and welcome to all who have joined us on this quarterly conference call. The developments during the last quarter can be summarized as follows. The Baltic Dry Index started the quarter at 4,074 and closed at 2,313 on November 12 of this year. The Baltic Cape Index numbers were 4,081 at the beginning of the quarter and 2365 on November 12. The Baltic Panamax Index started at 5,402, to close last Friday at 3612.

The year has seen a record number of bulk carrier deliveries, both by numbers and dead weight tonnage. About 70 million dwt are expected to be actually delivered this year, which is 60% higher on a year-on-year basis. Demand has met, and even exceeded, supply for most of the year, and slight increases in congestion, together with positive ton mile development, helped absorb the new tonnage entering the market. Panamax [inaudible] have so far averaged $22,000 a day, while Capes have earned on average $30,000 thus far this year.

The International Monetary Fund lowered its forecast for U.S. growth for this year and 2011, predicting a slow rebound, restrained by lack of growth in consumer spending. The world's largest economy will grow 2.6% this year, down from 3.3% projected in July. Growth is predicted to slow in 2011 to 2.3% compared to an earlier estimate of 2.9%.

As regards the world economy, it is projected to expand 4.2% next year. High unemployment, public debt, and fragile banking systems pose risks to global prosperity, warns the IMF, who urged policy makers to take bolder steps to ensure a sustained recovery. Growth for India is predicted to be 9.7% for this year, and 8.4% next year. Europe's economy grew during the second quarter this year by 1%, which was in line with estimates, but the fastest pace in four years. Consumer spending rose by only 0.2% during the second quarter, and exports led growth by climbing 4.4% during the same period.

In mid-October, the Chinese government approved the twelfth five-year plan. Deutsche Bank economists believe this might bring higher quality growth and may not focus on higher GDP growth. The economy is predicted to grow 9.6% in 2010, and 8.6% in 2011, with an average GDP growth of about 7% per annum over the next 10 years.

The above predictions about Chinese growth seem to be shared by Morgan Stanley's economist, who expects labor, capital, and productivity to decelerate over the coming decade, making the likely sustainable growth rate of GDP to be around 8% per annum over the next ten years. It is their view, with which we agree, that the Chinese economy is currently at an inflection point of growth: deceleration after having reached a certain level of development, to a number of consecutive years of very rapid growth.

This prediction is also confirmed by an economist of China's State Council Development Research Center, who in September stated that in future, the country will not enjoy the same double-digit rates of growth seen during the period from 2003 to 2007.

Let's look at demand. In the medium and long term, the demand factors affecting the dry bulk carrier industry [inaudible] to remain commodities shipped in bulk. Iron ore: According to Clarksons Research, after growing by 6% during 2010, iron ore shipments are expected to grow by 8% during 2011, which in a total volume of 1,000,034,000 tons.

In other words, there is news here affecting iron ore shipments, where Fortescue Metals Group is free now to embark on a $15 billion worth of iron ore projects in Australia, after ending ties with its original group of bankers.

On the consolidation front, Rio Tinto is seeking to merge its Australian iron ore operations with BHP Billiton Limited to save up to $10 billion in costs. Regulators are scrutinizing the proposed merger, especially after the filing of interim reports against the merger by the Japan and Korea Fair Trade Commission.

On a different front, India, the world's third-largest iron ore exporters, should ban shipments of this commodity overseas according to the country's steel minister. The reasoning behind this proposal is that the country will need increased quantities of iron ore to meet domestic demand from steel producers going forward. An end to shipments from India would increase global competition for supplies, potentially boosting prices and increasing volumes shipped from Brazil and Australia to the far east and elsewhere. On balance, this should have a positive effect on ton mile demand.

Coking coal now. After rising by a staggering 23% in 2010, coking coal shipments are expected to rise by a further 14% to reach 300 million tons in 2011, according to Clarksons Research. The most important development here has to do with the report that imports of coking coal from Mongolia have become increasingly popular with steelmakers in China. While thus far the major supplier of this commodity to China has been Australia, Mongolia has gradually increased in importance, and from June to August has overtaken Australia to become the top exporter to China. This will have an obvious effect on the rate of growth of shipments of coking coal from Australia to China.

Furthermore, in India limited metallurgical coal supply, coupled with expected growth in steel production, will underpin, according to most brokers, a 13% growth in imports for 2010 and a further 15% next year. Imports by Japan and the European Union are also expected to be up by 13% and 12% respectively during 2010.

As regards thermal coal, Clarksons expects shipments to increase by 6% in 2010 and a further 4% in 2011. Volumes are expected to reach 651 million tons in 2011. Here again, China is a central theme. The country has imported 59.4 million tons of steam coal by sea during the first eight months of 2010. Total imports for 2010 according to Clarksons are expected to reach 80.7 million tons. This would represent an increase of 45% over 2009 imported volumes.

Shipments of grain products, once a major determining factor of bulk carrier earnings, are expected according to Clarksons to remain steady during the 2010-2011 season, at 237 million tons, after dropping by about 4% during the 2009-2010 season. And this trade includes a forecast for grain exports from the U.S., Canada, and Australia to counterbalance to a large extent the impact of the expected reduction of exports from the Black Sea region.

Let's look at the ton mile effects now. The most important areas where the ton mile effect could affect demand the most are firstly, the iron ore trade from Brazil and Australia compared to the trip from India referred to above. Secondly, the new coal mines coming online in South Africa, Australia, and the rest of Africa should create longer coal voyages for the transportation of this commodity to Asia. Thirdly, the grain exports from the U.S. and Canada should increase considerably to replace the Black Sea capacity, which will be reduced dramatically during 2010-2011 grain season, as mentioned again earlier.

To conclude the demand side predictions, how do shipping analysts now see overall demand growing over the next three years? One of the most credible forecasts comes from shipping analyst Lawrence [inaudible], who predicts overall volumes, including the effect of changes in ton miles on demand and increased congestion, as follows: growth by 12.6% in 2011, by 10.3% in 2012, and by 9.5% in 2013. Naturally, there are vast discrepancies by type of commodity, as we have seen above.

Let's turn to supply. The new building order book for large bulk carriers today stands at 67.5% of the existing fleet of Capes, which is 133.4 million tons or 688 vessels, and at 54.4% for Panamaxes, represented by 77 ships of 71.1 million tons dw. These figures are better than they have been recently, but still quite scary if we were to assume that most of these ships will be delivered. Hopefully they will not, and we will discuss these prospects later on. However, what is of particular concern is the fact that so far this year 45 million tons of bulk carriers have been ordered, including some conversion projects.

Let's turn to scrapping now. Unfortunately, scrapping is not about to come to the rescue, at least for as long as freight markets remain at or around present levels. So far this year, only [inaudible] billion tons of Capes have been sold for scrap, while a mere 400,000 tons worth of Panamax bulkers have been scrapped.

On port congestion, that is expected to continue growing well into the latter part of next year, driven primarily by the coal and loading ports of Australia and to a more limited extent the discharge ports of iron ore in China. In percentage terms, shipping analyst R.S. Platou does not expect congestion to occupy more than between 6% and 7% of the existing bulk carrier fleet during 2011. We saw this percentage peak to just under 10% a couple of years ago.

Let's turn to the supply-demand balance now. In an effort to determine if it will be possible for bulk carriers for supply and demand to balance over the next couple of years, we have looked at three different scenarios as presented by [inaudible].

The worst case scenario assumes deliveries as per the current order book, and scrapping over the next two years in line with what we have seen so far this year. With demand anticipated to increase more or less as described above over the next two to three years, it is easy to conclude that the dry bulk freight market will collapse under the weight of tonnage joining the fleet over that period.

The best case scenario assumes a 50% non-delivery of the current order book, and scrappings from now onward at levels seen in 2009. If these predictions come to pass, the fleet will grow 11% this year and 9% in 2011. If demand predictions materialize, then the market should comfortably absorb the new tonnage, with significant differences, however, among the different size ranges.

According to the best case scenario, deliveries for the rest of 2010 are assumed similar to what we have seen so far this year. From 2011 onwards, this scenario assumes deliveries of only 50% of the registered order book, which is less than the [60%] we have seen so far in 2010. Scrapping is assumed to remain at the same level as during the first half of this year. If these assumptions materialize, the dry bulk carrier fleet will increase 14% in 2010 and only 10% next year.

Still, one can pick and choose the scenario one considers more likely to develop. It is merely a calculated guess. We at Diana lean toward the best case scenario, with slightly lower slippage than that assumed by [inaudible]. It should be kept in mind here that slippage is considerably higher for smaller vessels than for larger ones. A 60% of the order book actual rate of new building delivery would bring with it an increase in the fleet of about 13% during 2011 and 11% during 2012. In order for overall supply and demand to balance, we would need more congestion than has been assumed in the demand statistics mentioned above and more scrapping than has been assumed in the best case supply scenario.

The risk factors now. The main risks associated with the above mentioned model are firstly, measures by the Chinese government to cool down the economy, creating lower demand than anticipated, thus throwing off balance the favorable demand side assumptions, and secondly, the percentage of cancellations and delays of new building deliveries happens to be lower than assumed.

As we have been saying in past conference calls, we at Diana do not count on one specific scenario from those mentioned above to develop. It is the company's investment policy to acquire tonnage in a gradual manner that's averaging out the price paid for bulk carrier requisitions through the down cycle of the bulk carrier market.

We cannot escape the conclusion that buying a ship is a bit like placing a bet on the bulk carrier market. We at Diana do not follow the humorously [inaudible] advice allegedly given by a [inaudible] to betting clients at the Landmark casino in Las Vegas, who said "Don't forget, folks, the less you bet, the more you lose when you win." Unfortunately, there are some shipping investors who behave as if they take this advice seriously

I would now like to pass the call over to our chief financial officer, who will provide you with the highlights of the third quarter and nine months to 30 September, 2010.

Andreas Michalopoulos

Thank you Stacy, and good morning to everybody. I am pleased to be discussing today with you Diana's operational results for the third quarter and nine months ended September 30, 2010.

Net income for Diana Shipping Inc. for the third quarter of 2010 amounted to $33.8 million, and the earnings per share of Diana Shipping amounted to $0.42. Voyage and time charter revenues increased to $71.6 million compared to $58.2 million in 2009. The increase is attributable to increased revenues due to the addition in our fleet of the vessel Houston in October 2009, Melite in January 2010, and New York in March 2010 and the company's participation in Diana Containerships Inc.

Ownership days were 2,200 for the third quarter of 2010, compared to 1,748 in the same period of 2009. Fleet utilization was 99.7% in the third quarter of 2010, and 99.7% in 2009. The daily time charter equivalent rate for the third quarter of 2010 was $31,593, compared to $32,367 for 2009.

Voyage expenses were $3.3 million for the quarter. Operating expenses amounted to $13.1 million and increased by 27%. The increase is attributable to the 26% in ownership days resulting from the delivery of vessels Houston, Melite, and New York, and the container vessels Sagitta and Centaurus. Operating expenses also increased due to insurances, [inaudible] in sales and other. The increase was partly set off by decreased [fuel] costs.

Daily operating expenses were $5,962 for the third quarter of 2010, compared to $5,898 in 2009, representing an increase of 1%. Depreciation and amortization of deferred charges amounted to $13.8 million for the third quarter of 2010.

General and administrative expenses increased by $1.9 million, or 43%, for the third quarter of 2010, to $6.3 million compared to $4.4 million in 2009. The increase was mainly attributable to increase in salaries, compensation costs on restricted stocks, office rent, and expenses related to Diana Containerships Inc.

Interest and finance costs increased by $0.8 million to $1.5 million for the quarter, compared to $0.7 million in 2009. This increase was attributable to increased average debt during the third quarter of 2010 compared to 2009.

The nine months ended September 30, 2010 now. Net income for Diana Shipping Inc. for the nine months ended September 30, 2010 amounted to $96.5 million and the basic EPS of Diana Shipping amounted to $1.20. Net income for the period has been increased with losses attributed to minority interests amounting to $0.9 million.

Voyage and time charter revenues for the nine months ended September 30, 2010 increased to $202.5 million compared to $180.7 million in 2009. The increase is attributable to the addition in our fleet of the vessels Houston, Melite, and New York, and our participation in Diana Containership Sales and [was thought] the effect by decreased average hire rate during the nine months ended September 30, 2010, compared to the same period in 2009.

Ownership days was 6,097 for the nine months ended September 30, 2010, compared to 5,187 in the same period of 2009. Fleet utilization was 99.7% in the nine months ended September 30, 2010 and 98.9% in 2009. The daily time charter equivalent rate for the nine months ended September 30, 2010 was $32,212, compared to $33,444 for 2009. Voyage expenses were $8.9 million for the quarter.

Operating expenses amounted to $37.7 million, an increase by 25%. The increase is attributable to the 18% increase in ownership days resulting from the delivery of our vessels Houston, Melite, and New York and the container ships Sagitta and Centaurus, and the increase was also due to an increase in [inaudible] spares and repair. Daily operating expenses were $6,176 for the nine months ended September 30, 2010 compared to $5,795 in 2009, representing an increase of 7%.

Depreciation and amortization of deferred charges amounted to $38.8 million for the nine months ended September 30, 2010. General and administrative expenses increased by $5.5 million, or 43% for the nine months ended September 30, 2010, to $18.2 million, compared to $12.7 million in 2009. The increase was mainly attributable to increases in salaries, compensation costs on restricted stocks, office rent, and expenses relating to Diana Containerships Inc.

Interest and finance costs increased by $1.4 million to $3.8 million for the nine months ended September 30, 2010, compared to $2.4 million in 2009. This increase was attributable to increased average debt during the nine months ended September 30, 2010, compared to 2009.

And that was it for the finance section. Thank you for your attention. We would be pleased to respond to your questions, so I will turn the call to the operator who will instruct you as to the procedure for asking questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions.] Our first question is coming from Justin Yagerman of Deutsche Bank.

Justin Yagerman - Deutsche Bank

Wanted to get a sense - you guys recently did this financing agreement in China, and obviously fairly significant in terms of developing a relationship. How would you characterize dealing with Chinese Import Export Bank relative to the typical conversations that you've had in the past with European banks?

Simeon Palios

Well, I think we consider them very professional and we see no difference with the existing European or American counterparts. But I think Mr. Michalopoulos could brief you on that a little bit more because he was instrumental in bringing it together.

Andreas Michalopoulos

I think what we can say [in a few words] is that they are extremely selective. They are looking for companies that are sound. The fact that a company is listed on the New York Stock Exchange like ours also helps. And they are keen to give loans to companies that are building vessels in their country, China that is, in order to also support their industry together with giving a loan.

Justin Yagerman

Can you make any comments around pricing on the loan relative to European banks, how competitive they are right now? And then the duration of 10 years was a bit longer than we've seen most facilities come out [with]. Is that longer than any European banks are offering right now?

Andreas Michalopoulos

I think duration is a key point, and it is longer than what we see typically from a European bank today, although pricing for a company like ours - because we can only talk about our company - is similar.

Justin Yagerman

You guys haven't said all that much on the container ship contribution in the past, and I know that it's been something that you've been reluctant to comment on, but I would be interested to see if there's any thoughts around what kind of contribution that was in the quarter and how you guys are thinking about your ownership in that entity longer term. Is that going to be something that you look to further sell down depending on market conditions? How should we expect timing for the continued activity in that entity?

Simeon Palios

This is something that our board of directors may consider based on the circumstances, so at this particular moment we would not like to comment.

Justin Yagerman

Okay. That's all I've got for now. I guess the last question would just be commenting on the acquisition environment, what you guys are seeing. New builds seems to be where you deploy the most amount of cash, although you bought the 93-tonner recently. When you think about new builds versus second hand acquisitions right now what's more attractive, if anything is more attractive, and how are you looking to deploy cash in the near term?

Simeon Palios

I think the vessel which we are going to buy in the next one or two months will be something similar to what we have already bought. And provided she is less than five years of age I think it fits the requirements. But of course, we will be buying with the same method as we have used in the past, which means that every so often we will be buying one or two ships.

Justin Yagerman

I guess the question becomes a little more complicated only because you guys have strayed from just buying Capes and Panamaxes to buying these kind of Post-Panamax and then Newcastle Maxes in the last few purchases. How do you think about these off size vessels versus traditional size vessels in terms of your preference, or does it just come down to an individual vessel and its value proposition?

Simeon Palios

The [stern] for the iron ore and the coal is not very precise and I think that for the Post-Panamaxes very soon we will be getting the high [sterns] than the Panamaxes or the [inaudible]. Because iron ore or coal is of high demand and 10% over and above what these can ship today is not a problem. And these same [inaudible] for the Newcastle Max. but don't forget that the Newcastle Max is a vessel which at 180,000 tons has a [inaudible] of two meters less than the Cape, which is a lot of smaller [drought] to deal with. It will have an advantage.

Justin Yagerman

Absolutely. That's interesting.

Operator

Our next question is coming from Gregory Lewis of Credit Suisse

Gregory Lewis - Credit Suisse

Andreas, my first question is for you, and it's related to the decision by Diana to go ahead and purchase the office building where you operate. In terms of thinking about that were there tax implications which drove that decision to buy the building? And then my other question is in terms of thinking about rent and how that's going to affect the income statement. What types of impact should that have as it flows through into SG&A and depreciation and amortization?

Andreas Michalopoulos

Concerning the tax issue, I will let Mr. Palios answer. I will go very quickly on the second part of your question, to talk about the impact on the rent and the depreciation. Basically, our rent for 2010 was estimated for the entire year at around $900,000 to which we have actually already paid $660,000, so the difference is what we will save from the 8th of October to the end of the year. And for 2011 it was estimated at $1 million - a little bit less - $990,000. Concerning depreciation, this building is going to be depreciated at a 55-year rate so if you make the calculation the depreciation amount that you'll have to put in your model will be $233,948, which is the depreciation that will be on the building value that you will have. So you see that our net effect will be a positive effect of around $700,000 per year. [inaudible] without that [inaudible] value that you will have to evaluate at around EUR8 million. That's what we consider to be the [inaudible] value of that land.

Simeon Palios

All in all, the board of directors consider valuations by independent real estate brokers, and the result of this purchase on their specific advice was an appropriate good housekeeping transaction for the benefit of the company.

Anastasios Margaronis

Greg, if I may add about [this transaction] you should understand that things here in Greece have changed. This has been a direct impact of the Greek crisis for the shipping companies. We strongly feel that others will follow. This, as Mr. Palios said, is a very good housekeeping way and we have eliminated all related party transactions and we have avoided the problems with the taxations that were going to be passed to the actual occupants of the building.

Gregory Lewis

And then my other question is more related to the three-year charter, I believe on the Triton. That was a pretty attractive charter. I think it was three years at around $20,000 a day. Given the fact that we're seeing time charters of three years at $20,000 a day I have to believe that that should support asset prices where they are, if not push them higher. In terms of thinking about that, is that sort of how we should be thinking about asset prices when we see time charters like that?

Anastasios Margaronis

If you believe that the charterers have a crystal ball and know what the market is going to do after two or three years from now, then that's a correct assumption. However, history has proven that this is not always the case. The fact that you can find rates like this today is because the FFA markets justify those rates and they can cover themselves. Now, you and I and everybody else know very well that the FFA market is there only for people to make money because simply it is not correct. Either upwards or downwards. So I don't think that this is a safe assumption for someone to make looking at the willingness of the charterers to charter vessels for a longer term, meaning that they know that the market is going to be good or bad.

Ioannis Zafirakis

The first two years are for sure covered by FFAs. The third year possibly not, but these kinds of charters secure the hardware to execute conducts of [inaudible], which are longer term and some charterers take the view that they prefer to have a known cost of transportation if it's not exorbitantly high, than to leave it as an unknown as far as their calculations are concerned when they're entering into contracts of [inaudible].

Gregory Lewis

And then just really quick, I know you don't break out the container ship fleet in terms of what various charges are, but is it possible for you to give us what the actual operating days for the container ship fleet logged in the third quarter?

Ioannis Zafirakis

Actually, this is not something for Diana Shipping Inc. to comment on, but I don't know whether you have noticed Diana Containerships Inc. they have issued a press release with their earnings for Q3. There is a press release that is going to be a 6-K file. Diana Containerships Inc. is a public company and this is something not for this conference call, let's put it like that.

Operator

Our next question is coming from Michael Webber of Wells Fargo.

Michael Webber - Wells Fargo

Just want to veer back in on the acquisition question and kind of talk a little bit about vessel sizes. I know you talked about new build versus secondhand, and a bit about the off size vessels. Is there any concern there that you're limiting your cargos by moving up to the Newcastle Maxes that are primarily trading in the iron ore and the coal? As you think about acquisitions going forward should we be primarily focused purely on the major bulks or would you ever consider moving down to some of the smaller vessels that some of your competitors seem to be doing?

Simeon Palios

No, I think we will stick to the Panamaxes, [inaudible], Post-Panamaxes, Capes, and Newcastle Maxes, and I think that's enough. [I think] we have a very broadened range that we can work, and I think primarily the ships - the Capes and the Newcastle Maxes - the main cargo is coal and iron ore. The only size that takes grain is the Panamaxes and the others of course.

Michael Webber

Right. I guess when you think about moving forward and staying in those asset classes is that a demand driven decision by your expectations on demand for major bulk commodities or is that more of a supply driven decision where you're looking at the order book and you just continue to like the major side of it?

Simeon Palios

It has to do with our model, with our strategy. You know very well that Diana Shipping Inc. has a specific model and the volatility of those sizes is something that goes along with the model that we have playing with the business cycle, with the shipping cycle. For us the smaller vessels that they have smaller volatility is something that does not go along with the strategies that we have.

Michael Webber

Fair enough. A followup question on the office building. Can you give a sense of where that was valued in the past and give a sense of where that asset has trended? And then maybe talk a bit about your firm profile there versus some recent acquisitions just so we can think about the metrics that went into that decision?

Simeon Palios

The valuation process was entirely done by the independent members of the board of directors. The executive members were not present in this discussion and in this meeting. They have gathered valuations from the brokers. They also [inaudible] the discounted cash flow analysis and they came up with the projection of the price which was approved by the entire board of directors. They have clearly seen that the quantifiable and non-quantifiable benefits of that transaction were fairly valued at the price that the building was actually bought.

Michael Webber

With regard to the asset, I think from an appraisal standpoint, is this something that has been appraised recently? Has the asset value basically remained flat? It sounds like this is driven by a potential change in tax laws, but just from an asset perspective has that value basically remained relatively flat or are we seeing something of a peak or a trough?

Simeon Palios

At the moment the fear of the company was the rent cost, that it was basically increasing and it was going to reach a level where it was not going to be for the benefit of the company and also the fact that moving to another building it was very, very difficult and very difficult to find a building that gives the company the ability to operate from. And basically I don't think that there was any kind of discussion on where the market values are on buildings and where they're supposed to go or where they were in the past. I don't think that the board considered that factor. And don't forget that this is an asset. It's not money that was spent and went outside the company. We have plans to stay in the company, in the shipping sector, for many, many, many years, and this is a building where Diana Shipping Services is going to operate from.

Operator

Thank you. Our next question is coming from Natasha Boyden of Cantor Fitzgerald.

Natasha Boyden - Cantor Fitzgerald

You've talked about your desires to buy more assets and I understand that, but have you given any thought to other uses of the cash such as repurchasing shares at all?

Anastasios Margaronis

We have stated very clearly at the time where we put the share buyback program in place, or removed it more likely, that this instrument was more an instrument to protect ourselves more than a speculative instrument to be paid to repurchase shares. And what do I mean by that? The question of at what price do you think your share will be at risk and you will go on and use that product, most likely we cannot even say that today because it will depend on the gap of what we consider to be our net asset value and that we analyze all of the [inaudible] very well versus the share price at the time. So no, I think our business is to be in shipping, to deploy in a [inaudible] manner our cash to buy dry bulk vessels and to have a good average around what will probably be around the bottom of the cycle, and that's what we are going to focus on. And [inaudible] our product in place to protect ourselves against some unexpected debt.

Natasha Boyden

I've just got a couple of macro questions for you. We're going to start seeing the beginning of the operations of the [inaudible] locks starting sometime next year. I'm really curious to get your take on what you believe the impact that this is going to have on the traditional Capesize market.

Andreas Michalopoulos

Effectively we're going to see the [inaudible] ships trading on one laden and one ballast voyage back to their load port effectively because they are unable to call at many ports in the world and [I'm] able to triangulate the trade that they're employed in. So it's going to be interesting to see whether the laden voyage is going to be profitable enough to justify the investment into ships like these.

Nobody can predict exactly what will happen. Our feeling is that these ships are going to look in a couple of years, maybe a bit longer, [inaudible] what the ULCCs looked like a while back in the tanker industry. But it will all depend on the willingness of governments to build ports that can accommodate these units. For the time being, we haven't seen that willingness as being overwhelming. If anything it has been very restricted and therefore we are not that optimistic about the success of the trade that these ships would be involved in.

But it's still very early days. If these voyages as I've just described prove to be profitable for those performing them then we're going to see more ports being built to accommodate them and the trade will move up one notch to deal with shipments of this size. But it's too early yet to make a prediction.

Simeon Palios

If I may, [inaudible], they are not bulk carriers, so [inaudible] of the iron ore and not the coal. So you have only one cargo to accommodate. So we do prefer the smaller bulk carriers which are the Newcastle Max because they can trade both on iron ore and on coal, and I'm referring to the size, the volume, which they can accommodate the coal also and they can take full cargo of coal together with iron.

Natasha Boyden

And then just lastly, we've definitely seen a resurgence in new [new coal orders] over the last few months. Just in your opinion is this just shipyards looking to replace lost [inaudible] or do you think this represents an actual increase in the order book?

Andreas Michalopoulos

It is an actual increase in the order book because with recent [inaudible] market strength which we saw until this summer, but now it's [inaudible]. Second hand values were seen higher than new building values for deliveries of ships from 2012 onward. So some owners took the view that to order a few ships for delivery from 2013 and the end of 2012 and 2014 even at the relatively lower price than what they had to pay for a good modern vessel and ordered these ships. Now as far as we are concerned this is not a good time [inaudible] because we are not going to address any potential oversupply of tonnage in the future if we keep going down that route. Hopefully that will be reversed, but we have to wait and see how aggressive shipyards will become on their pricing strategy. For the time being we haven't seen much aggression. The contracts are all - they seem profitable for the shipyard that they are being [inaudible] into. But owners are enticed because of this price differential that I mentioned a few minutes ago.

Operator

Our next question is coming from Fotis Giannakoulis of Morgan Stanley.

Fotis Giannakoulis - Morgan Stanley

Most has been covered by Natasha and Justin, but you have right now the strongest balances in the industry - over a billion dollars of acquisition power. You answered about the buybacks - I want to know if you can consider in the future expanding your participation in the container ship venture and potentially committing more money than what we already have.

Simeon Palios

We have replied to that question previously by saying that this is something for the board of Diana Shipping Inc. to consider and depending on the circumstances we will judge whether to invest more money in Diana Containerships Inc. or not. This is something that we have not planned for the moment.

Fotis Giannakoulis

So is there a chance that we see in the future the container ship segment being - right now is only a small fraction of Diana Shipping, but is there a chance that we will see it being more than 20% of the entire company?

Anastasios Margaronis

We have repeatedly said in the past that we do not consider diversification in a company as a good thing for our shareholders, so when that number becomes meaningful or even before that it is more likely that the two companies will be entirely separated and there will be a spinoff of the smaller company. We do not consider diversification within the same company a good thing.

Fotis Giannakoulis

That's good to hear. That answers my question. And the second I want to ask you Mr. Margaronis talked about congestion earlier and we saw that congestion the last few weeks has declined significantly. Is there any specific reason for that? Do you see the congestion moving up and potentially giving some further boost to dry bulk rates?

Anastasios Margaronis

As I mentioned, if these volumes that I described earlier on as predictions from various analysts materialized, it was going to be at least in the medium term an increase in congestion up to levels that will take up about 6% or 7% of the bulk carrier fleet. Now if this doesn't happen it means that demand is going to be lower and volumes are going to be lower, which means that the freight market is going to be weaker as well, which is going to be negative, regrettably. So congestion is going to add to the problem, or lack thereof, if demand doesn't materialize. So if it goes down the trend that we have seen over the last few weeks this means that we're going to have a weaker freight market, which is going to be even weaker with the additional tonnages that are going to be released from the queues of ships waiting to load or discharge. And we have seen this in the past. Fortunately it didn't last for too long, but it might happen again unless volumes of cargo start ticking up rather quickly and we don't fall into the situation where there's too much tonnage chasing a certain amount of business.

Simeon Palios

I think Fotis, you should understand that the congestion is directly proportional to the freight market.

Fotis Giannakoulis

Yeah, but what we're trying to see is what drives what and if you have any view if this is in the near term if this is going to move back to the previous levels again.

Simeon Palios

It will depend on the freight market.

Anastasios Margaronis

The drivers are demand and volumes of cargo. That's the driver. The congestion issue is a factor which is [inaudible] accentuates an increase in the freight market or depresses even further a reduction in rate. And so this in a way follows, because we can't have infrastructure projects coming on stream within a few quarters, as we know. It takes longer than that. And that is the reason why we speak to you of congestion. It's something that follows the freight market and demand and influences as a secondary influence not as a primary factor.

Fotis Giannakoulis

May I ask if you see any signs that by the end of the year we might see again iron ore imports moving higher? Because we saw last month with all the holidays in Asia iron ore imports declining considerably while at the same time still demand was up 5%. Is there any sign from your chartering activity the signs or the communications that you have that we might see some increase in iron ore imports soon?

Andreas Michalopoulos

Yes, there is that possibility. We haven't got signs, because we're not in the spot market and we don't do voyage charters but there is a possibility that this might happen. It tends to happen toward year end, but we are looking beyond that now as you can imagine because that's pretty irrelevant as far as the medium-term prospects of the market are concerned, and we're looking way into 2011, even from the middle of that year onward, and are trying now to see how the influx of new ships, the lack of scrapping, and congestion at around 6% to 7% of the world fleet is going to help develop a freight market which will be healthy or not healthy depending on these factors and how they exert their influence on it and we tend to be a little bit pessimistic especially if the very aggressive forecasts for demand growth do not materialize. And the ones I mentioned earlier are as you can appreciate quite aggressive historically.

Operator

Thank you. Our next question is coming from Urs Dür of Lazard.

Tatiana - Lazard

Hello, it's Tatiana for Urs. I have a question on Indian coal. They have quite high inventories at ports and the power plants, but yet raised prices recently. So my question is [inaudible] by import volumes over the last two weeks maybe?

Andreas Michalopoulos

So Indian coal is going to be a determining factor here for the coal trade, and we feel that some port projects that are being developed there, together with the country's appetite for more coal, are going to be very supportive for the importation of coal. Now on the short-term movements in the prices we're not in a position to answer, as we don't trade commodities, but the way that the shipments are developing we are very confident both for thermal or steam coal and coking or metallurgical coal shipments, both to India, and we think that the main bottleneck is going to be the inability of the country to accommodate the ships needed to discharge the amount of coal required. And that now puts a cap, which we feel is going to be on the order of 13-15% a year over the next couple of years, which is as far as we can see out into the future for infrastructure projects coming on stream. If this were not a restrictive factor, we could see India increasing by over 20% the imports of coal from the numbers we can see.

Operator

Thank you. There are no further questions at this time. I'd like to hand the floor back over to management for any closing comments.

Simeon Palios

Thank you again for your interest in, and support of, Diana Shipping. We look forward to speaking with you next quarter.

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