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Trecora Resources (NYSE:TREC)

Q2 2014 Earnings Conference Call

July 31, 2014 4:30 PM ET

Executives

Jeff Fowlds - IR

Nick Carter - President and CEO

Connie Cook - CFO

Simon Upfill-Brown - President, South Hampton Resources

Analysts

Sarkis Sherbetchyan - B. Riley & Company

John Curti - Singular Research

Tom Harenburg - Carl Hennig Incorporated

Operator

Good day, ladies and gentlemen and welcome to Trecora Resources Second Quarter 2014 Earnings Conference Call. Today’s conference is being recorded.

And I will now turn the conference over to Mr. Jeff Fowlds with Genesis Select. Please go ahead, Mr. Fowlds.

Jeff Fowlds

Great, thank you operator. Good afternoon, everyone. Welcome to the Trecora Resources second quarter 2014 earnings call. The earnings release was distributed over the wire approximately 30 minutes ago and should be available on most financial Web sites.

On our call today will be Nick Carter, Chief Executive Officer and President of Trecora; Connie Cook, Chief Financial Officer; and Simon Upfill-Brown, President of South Hampton Resources. Following management's prepared comments, there will be a formal Q&A session open to participants on the call.

Before we get started today, I'm going to review the Safe Harbor statements, which is slide two in the presentation. Statements in this conference call that are not descriptions of historical facts are forward-looking statements related to future events and as such, all forward-looking statements are made pursuant to the Securities Litigation Reform Act of 1995.

These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the following; a downturn in the economic environment; the Company’s failure to meet growth and productivity objectives; fluctuations in revenues and purchases; impact of local, legal, economic, political, and health conditions; competitive conditions; impact of relationships with critical suppliers; impact of changes in market liquidity, conditions and customer credit risk on receivables; the Company’s ability to successfully manage acquisitions and alliances; industry cycles; specific petrochemical products and mineral prices; feedstock availability; technological developments; regulatory changes; foreign government instability; foreign legal and political concepts; and foreign currency fluctuations, as well as other risks.

For further information on the potential factors that could affect the Company’s financial results can be found in the Company’s reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission, which can be reviewed at www.sec.gov. As a reminder, this webcast is accompanied by a slide presentation that is accessible on the Trecora Resources’ Web site at www.trecora.com for those who want to participate in the Q&A you must to do so with the dial-in provided in the release today and in the call announcement on July 17, 2014.

Now I will turn the call over to Chief Executive Officer and President, Nick Carter, for his comments. Nick?

Nick Carter

Thank you, Jeff and thank all of you who joined us for the first Trecora Resources’ conference call using our new name, our new name is derived from trust, ecology and the core of the earth, the new name fits our business model very well and we’ve had a really good response to the change.

This will be an enjoyable discussion of our second quarter 2014 financial results as it was a very good quarter. As Jeff mentioned, slides are available on the Web site and slide three identifies the agenda for today’s call. I will give you a high level look at our business and then we’ll have Connie Cook follow-up with a more detailed discussion of the financial results and Simon Upfill-Brown will discuss South Hampton Resources operational update. I will then conclude with an operational update on AMAK mining activity and then have a final summary.

As you can see on slide four, our petrochemical sales and volume trends continue to demonstrate high product demand for the quarter, being up 33% and 32% respectively. In the second quarter, we did receive some additional help from product interruptions at our primary competitor, which added a small incremental demand in already strong quarter. In addition, one of our customers continued to require shipments of those contracted volumes. International sales were also continues the strong growth trend, international volume now makes up about 28.6% of total volume. Though this is down slightly from the first quarter, it is up nicely from the 23.9% in 2013.

We recently signed three new clients in Asia-Pacific, our first three ever in this region, and our volumes in the Canadian oil sands have shown consistently good results throughout 2014. And at this point, do not have any material drop-off. As volumes continue to demonstrate steady growth, we anticipate margins should continue to rise. We continue to distinguish ourselves from our competition by providing the consistent high-quality product that our customers need and the dependable service and delivery for which we are known.

Slide five shows that our feedstock cost per gallon continue to be under control, and are fluctuating within a manageable range. With the increased supply of the NGLs from the shale formations in North America and thus a very solid supply-demand relationship, we anticipate that there should not be any significant change in feedstock pricing for this foreseeable future. However, as many of you know if we did experience any significant fluctuation in the price of feedstock, we have some protection to our margins from the formula of pricing structure, which exists for about 50% of our volume.

Let’s go to slide six, this slide is a reminder of capital investment that’s pulling into the domestic petrochemical projects, either planned or already underway, any of these are current customers of Trecora and our anticipated to come online in 2016 through 2018. Estimates for the U.S. chemical industry capital investment for 2010 through 2020 have recently been increased from 89 billion, shown on next slide, to 117 billion in the latest publications.

We keep reminding the investment community of this situation as is the basis for our strong optimism we have for our Company’s performance over the next five to seven years. Slide seven, provide some financial highlights, our second quarter was record quarter for nearly all of our financial metrics, revenues, gross profit, operating income and adjusted EBITDA. Net income fell short due to lack-cluster results from AMAK, primarily as a result of metal pricing in the quarter and some increase in overhead cost but strong revenue growth in our petrochemical business was achieved through strong volume trends, shipping at the competitor’s plant and the usual seasonal pick up that we normally see in the second quarter.

Most of you know that the second and third quarters are historically our stronger quarters. Gross margins demonstrated a snap-back in the second quarter from the first quarter, impart due to seasonal rebound but also reflecting the strong volume levels recent price increases and a lower percentage of byproduct sales as a percent of total revenues. The percentage of byproduct, or excess product sales, the total sales for the second quarter came in at 23% versus about 30% in the first quarter and we did a much better job of managing our business. Sam is going to explain little more about this little bit later.

The improved volume trends were aided by our recent efforts to debottleneck the plant, which helped improve capacity utilization for the quarter. In the month of June, capacity utilization, based upon 6,700 barrels a day, added 93%, bringing the quarter in at about 84% on average versus 65% in the second quarter last year and 78% in the first quarter of 2014. Improved asset utilization should help us increase the revenue levels from existing capacity for the balance of 2014 and on into 2015, and Sam is also going to little touch on that some more little bit.

Trecora’s strategy over the last five years has been to continue to drive market share gains. However, we believe in average the level that’s going to be difficult to significantly exceed the near 75% in U.S. market. As a result of these high market share levels, our revenues are now being driven by demand pool environment from our customers. Going forward, this capital investment and result in demand growth will provide a path for the financial growth for Trecora. This situation has fueled our decision to add an additional 4,000 barrels per day of feed capacity at our Silsbee facility. We discussed this deep terrain expansion in our last quarterly review, and have begun to make strides in the purchase equivalent acquiring of the land and the building out of fabrication space.

We continue to estimate that the cost will run approximately $30 million, and will be financed out of cash and bank debt. We recently obtained a $25 million term loan from Bank of America for the project, which was announced to be in 8-K filing on July 16th. We have targeted the end of 2015 for completion that have been investigating ways of phasing in completion earlier as we’re seeing paths that increase demand may be coming sooner than we originally anticipated. We believe this additional capacity will carry us through the following five to seven years and help us to maintain our position as a market leader.

Now, I’ll hand the call over to Connie Cook, our CFO, who will review our financial results for the quarter. Connie?

Connie Cook

Thank you, Nick. Slide eight, presents the income statement for the second quarter of 2014. Quarterly revenue increased 33.2% to 74.6 million compared to revenue of 56 million for the same period a year ago. The increase in revenue was due to an increase in volume and processing fees. Volume of petrochemical sales increased 32% due to increased demand as our primary competitor experience product interruptions, normal seasonal fluctuations, and when customer continuing to take of that contracted volume.

We had an increase in deferred sales volume of approximately 16% in the second quarter of 2014 versus the second quarter of 2013. These are orders that had shift but were not delivered that quarter, and therefore will follow into the third quarter. Deferred sales volume was down from the first quarter 2014 by about 16%. Petrochemical product sales represented 72.8 million or 97.7% of total revenue for the second quarter of 2014 versus 54.8 million or 97.8% of total revenue for the same period last year. They reported 1.7 million in processing fees during the quarter, which was up 41.1% from 1.2 million a year ago. This is a result of the increased fees charged under new contracts.

Cost of sales, including depreciation, totaled 62.9 million, an increase of 32.6% versus 47.4 million in the same period of 2013, due to the higher volumes processed to support the additional demand and a 6.1% increase in average feedstock price per gallon.

Gross profit margins for the quarter were 15.7% compared to 15.3% in the year ago period, but up from the 13.6% in the first quarter of 2014. The increase in gross profit margins during the second quarter of 2014 was primarily due to the increased volumes, some price increases and fewer byproduct sales.

G&A costs for the second quarter of 2014 were 4.2 million versus 3.5 million in 2013. The increase was primarily due to the increase in stock-option compensation, insurance premium, property taxes, consulting fees and accounting fees.

Total operating income was 7.4 million in 2Q of ‘14 versus 5 million for 2Q of ’13, which is a 49% increase. We reported a net income attributable to Trecora Resources in the second quarter of 2014 of 5 million, or $0.21 per basic and $0.20 per diluted share, compared with 6.3 million or $0.26 per basic and diluted share in the second quarter of 2013. The decline in net income was attributable to lower earnings from AMAK and no gain recognition on AMAK stock issuances.

In the second quarter of 2013, we had recognized a $4 million gain from additional equity issued by AMAK, whereas in the second quarter of 2014, there was no additional issuance. While AMAK met their revenue and shipment targets, the earnings contribution fell short due to a lower average metal prices and higher overhead costs. Nick will discuss this in more detail later. EBITDA for the second quarter of 2014 was 8.4 million compared to 10.6 million last year. Adjusted EBITDA, which removes the effect of AMAK for comparative purposes for 2Q ’14 was 8.4 million compared to 5.9 million in 2Q ’13.

Slide nine presents our balance sheet. Trade receivables increased 6.1 million from year-end 2013, primarily due to the increase in sales volume. Long-term debt was approximately 8.1 million at quarter end compared to 11.8 million in 2013. During the second quarter of 2014, we made net principal payments of 0.7 million on our term debt and 3 million on our line of credit.

Capital expenditures for 2Q ’14 were 2.4 million as compared to 1.7 million during 2Q ’13, an increase of 45.9%, primarily associated with preparations for the D-Train expansion. We had 34.8 million in working capital as of June 30, 2014, which was up from the year-end. We ended the quarter with a current ratio of 3.2 to 1 and shareholders’ equity increased to 111.7 million from 102.9 million as of December 31, 2013.

That concludes the financial review. I will now turn the call over to Simon. Simon?

Simon Upfill-Brown

Thank you, Connie. Let’s go to slide nine, and I will give you some additional details around the operational activities in South Hampton resources for this last quarter.

As Nick and Connie suggested, we had a strong quarter in our petrochemical business, but petrochemical product sales at 72.8 million for the second quarter of ’14 versus 54.8 million in the second quarter of ’13. Deferred sales were 2.3 million gallons, down from 2.7 million gallons in the first quarter of 2014, or in dollar terms from $10 million to 8.8 million. Prime product sales were up 29.3% from the second quarter 2013, and represented 77% of all-product sales volume versus 79% in last year’s second quarter.

Byproducts, excess product sales came down from 30% last quarter to 23% this quarter, a welcome trend, bearing in mind that with our current feedstock and technology, it is unlikely that we will get below 20% byproduct sales. Though there is some seasonality in the number, we managed our mix of products better as well. Excess product is sold in many cases at low margins than we normally receive therefore we continue to strive to find high-price markets and new customers for excess product and our byproduct. As we discussed last quarter, we are working to find options to minimize the production of the excess product and are starting to have some success in this regard.

International sales volumes represent28% of total revenues in the first half of 2014, up from 23.9% for the full year 2013 but down from 35% in the first quarter this year. As our cost advantage and feedstock remains high, we are continuing to leverage our position around the world. As Nick mentioned earlier, we received our first three orders out of the Asia Pacific area and we’re excited about the opportunity there. We continue to collect more information on how to successfully do business in China and other Asian countries.

Demand for the product out of the Canadian oil sands remains high and we believe that phase two, which begin in 2015 will provide another leg upward. We have made early strides in the development of D-Train and are now pursuing a strategy of potentially rolling out our expansion in phases. As we have discussed previously, we’re intended to add 4,000 barrels of feedstock capacity to the approximately 7,000 barrels that we have today. So our official scheduled completion date is end of 2015, we are investigating ways of adding capacity and tranches to meet any incremental demand we may see in early to mid-2015. As we have discussed, we initially were adding this capacity to meet the demand we foresaw coming in 2016 through 2018.

As you can see on slide 11, we have made some inroads in fabricating piping spool pieces as time allows, that’s the right hand photograph and clearing the land, top and bottom of the photo on the left, and as mentioned last year in buying long lead time item equipment. It is exciting to see this project moving forward. We pride ourselves and being responsive and flexible, which allows us to react rapidly to customer needs and deliver on the exceptional quality, outstanding service reputation we have earned from our Fortune 500 customers. This remains an important competitive differentiator for South Hampton Resources and important reason to build capacity ahead of demand.

We continue to evaluate strategic acquisition targets that both fits into our existing business model of niche markets with high service component and where we can increase number of customers, acquire new technologies and add new products. We have visited with several companies over the last 12 to 18 months. However, we are not far enough the long on any opportunities to be able to discuss it with you. We continue to follow the philosophy that no acquisition is better than a bad acquisition.

As Connie mentioned, revenue growth in our toll processing business was over 41% in the second quarter and we remain excited about the opportunities we see in this business, and encouraged by the margins that we are able to achieve. The changes that we made to our tolling agreements last year have proved to be very beneficial. The number of additional projects to bid on continues to grow and we are pleased to see that one potential client is funding some initial engineering work.

With that, I’d like to turn the call back to Nick.

Nick Carter

Thank you, Sam. And the mining sector has been weak, as you know, but we really haven’t accepted that AMAK should not be performing at positive level.

Moving to slide 12, I would classify the results from AMAK as mixed. The earnings contribution from AMAK to Trecora was minimal, however the shipments of ore that did not ship in the first quarter 2014 did in fact get shipped in the second quarter, and as a result four shipments, two each of the copper and zinc, were made in that quarter. That shipping noted that were that volumes fell short of budget by 12.9%, some of that shortfall was due to lower production levels in the quarter and some of it was due to the taking of space in the first ship by leftover material from the end of the year of sales, which had been moved out with priority before the fresh material could be moved.

Revenues for the second quarter came in at $30.4 million versus $15.3 million in the second quarter last year, a substantial increase however margins were under pressure primarily due to weakness in metal pricing in the quarter and an increase in overhead cost. The increase in overhead costs were a direct reflect of the recent higher lever hirers that were made in the quarter, and we had overlapping cost of salaries and other employment expenses from the existing employees. We added a new CEO, who is from Denver area, a new mining engineering who is from Canada, and a new mill manager who comes from Australia. Additionally, we’ve strengthened the maintenance department with new personnel. On cash flow basis for the six months, AMAK was positive for about 8 million, so they are generating sufficient cash flow to operate and also in compliance with all their debt covenants.

Our outlook for 2014 remains good, it’s about 31,500 wet metric tons of copper concentrate and around 38,000 wet metric tons of zinc concentrate are planned to be produced in total for the year. The change in the mix of product from the previous year has to do with the ore grades are expected to be mined this year. Also as we mentioned previously, AMAK considers about $60 per ton of ore as our cash cost for full production.

As mentioned in the last call, the precious metal recovery circuit has been modified by the contractors through expanse and AMAK host has it functioning properly later this year. AMAK is currently paid for the gold and silver contained in the copper concentrate but not that contained in the zinc concentrate nor in the tailings, therefore there is potential of economic gain at the precious metal circuit is functioning properly with sufficient recovery. AMAK has steady operations and has accumulated most of the equipment needed from an ongoing operation, and there is spare-parts procurement program is steadily advancing.

Unfortunately, there is no news on applications for additional leases. We are following the progress of these closely and we will report on any significant event. We would like to have these finalized prior to the IPO, which is coming out sometime in the next year or so that to no harm cause by the delay and the issuance of releases at this point in time. Our study quite and say still feel that the leases will be issued before the end of this year, but on the other hand I’m not sure that’s not what they said last year too, so we’ll see.

As far as this summary listed on slide 13, in summary, we’re pleased with the record financial results in the petrochemical business for the second quarter and believe that the outlook has never looked brighter, manageable feed cost, strong supply-demand backdrop than the U.S. natural gas and the NGL markets, and increasing demand from our major customers resulting from expanding capital investment. We intend to meet the challenges of this powerful macro and micro backdrop with an expansion of our own D-Train, which will add nearly 60% through our existing capacity, brining this to 11,000 barrels per day, up from 7,000 barrels per day.

We are continuing to expand our geographical footprint to take advantage of the U.S. cost advantage of using NGLs as a feedstock versus the oil based feedstock that used aboard. Opportunities in the Asia-Pacific region, the Canadian oil sands in the Middle East provide the Company with a tremendous growth outlook internationally. And we are evaluating all alternatives for capital expansion domestically to capture some of the business that’s been generated by the 117 billion in capital investment, that’s been made by our customers in the chemical industry over the next 10 years.

At AMAK, we continue to see a tremendous opportunity to expand the footprint, Saudi Arabia, about pursuing the increase in square kilometers of leases properties, expanding reserve life and improving recoveries of the existing facilities. The high fuel requirement will be faced over subsequent months will give us an opportunities to see what to recognize public value of these assets where as AMAK brings in new management and handle these challenges they are also cognizant of the need to work on efficiencies and cost controls, bringing the Company a sustained profitability in the volatile metals environment.

This concludes my prepared remarks. And at this time, I would like to open the call for questions. Operator, please open the call for questions.

Question-and-Answer Session

Operator

Certainly, Mr. Carter (Operator Instructions). We’ll hear from Sarkis Sherbetchyan with B. Riley & Company.

Sarkis Sherbetchyan - B. Riley & Company

So, first question has really standing around the competitors, interruption the product interruptions you guys mentioned. Can you give us some color as to maybe how much that impacted your sales volumes positively?

Simon Upfill-Brown

Sarkis, it’s hard to tell exactly that we would estimated to been round about 1 million gallons in the second quarter of ’14.

Sarkis Sherbetchyan - B. Riley & Company

Okay. And do you anticipate that benefit to continue or is that really just isolated the 2Q?

Simon Upfill-Brown

No, we’ve had a couple of customers indicate that they will allow us to keep a larger share of their volume. This is bad time and less continuous that our competitors done this and I think it’s starting to impact their ability to retain very high shares as some customers. So, we expect there will be some longer-term benefit.

Sarkis Sherbetchyan - B. Riley & Company

Okay, understood, that’s very helpful. And then from the pricing standpoint, did you noticed any pricing differential as the quarter kind of went by and maybe if you can touch upon what you feel the outlook for pricing looks like going forward?

Simon Upfill-Brown

Well, as Nick mentioned, we have 50% of our business under -- as a fix margin over an index. So, there is limited movement there. But there were some areas we were able to get price increases, it’s always a little bit difficult knowing how those are going to be retained but we were able to be able to get some during the second quarter and maybe into the first part of this third quarter.

Sarkis Sherbetchyan - B. Riley & Company

Okay, that’s helpful, Simon. And if maybe I can move on to just three new customers you mentioned from the Asia-Pacific area. Can you maybe give us some color as to perhaps some volume ramp or just kind of the opportunities, the business you see that you’ve won as well as going forward?

Nick Carter

This process is a slow one right. So these were the first trial orders we’ve got from these customers. A lot will depend on future orders and how those trials go. But they were all in markets where the high purity attributes of our products count. So, we are optimistic that we were able to get some ongoing business from them, but these were their initial trial orders where they’ll be testing our product at scale. You go through the process of sending a datasheet, you send small samples, and these are significant volumes that we’ve sent now. But the longer-term ongoing volume will depend on how well the product works in their system and how we can show the economic benefit of using our products.

Sarkis Sherbetchyan - B. Riley & Company

Okay, that’s helpful, thank you. And then maybe if I can touch a little bit upon the capacity expansion on the D-Train. You guys did mention that you’re securing some of longer lease time equipment here. And you did mention something about -- potentially the capacity expansion. Can you give us some of your thought processes around how you would be able to accomplish that and also you guys did try a credit agreement, I believe it was up to $25 million for the expansion. Maybe you guys can touch upon the financing impact and how that would impact the balance sheet as we look forward?

Nick Carter

Let’s Connie comment on the financing side of things. The way we think we can do this is knock off where we have the biggest spot on facility now first and then hit the second bottleneck and then complete finish off the expansion altogether it will be end of the next year. So it will allow us to get a little bit volume sooner rather. So this is the plan. It will be a continuous process though. It's not like we’re going to start. We'll start building and continue to build. But there are certain areas of the plant that we’d focus on first that will give us additional capacity sooner and so on and so on. That’s the approach we’re going to take.

Connie Cook

Yes, as far as the debt agreement, it will be drawn out over the construction time based upon the expenditures that we made. Once we are finished with the project, it will convert to what is called a mini-term loan and will be amortized over 15 years. So current amount will be whatever happens to be based on the amortization. Interest will be paid quarterly, even through the first year becomes a mini-term.

Sarkis Sherbetchyan - B. Riley & Company

Okay. That’s help. Sorry, just to understand it would not be in one whole suite, that drive down? It would essentially be …

Connie Cook

No, we wouldn’t get it all at one time. As we make expenditures and even money, we'll draw down on that.

Sarkis Sherbetchyan - B. Riley & Company

That’s helpful. And then just a final question if I may, can you may share us your thoughts around [indiscernible] progress towards an IPO?

Nick Carter

Progress is good. We’re going to see some improvements we hope in the latter half of this year. I think I talked last phone call that about maybe improvements to the town circuit which will make us -- allows them to produce better zinc product. That should be complete pretty soon. The improvements to the precious metal circuit will be completed sometime before the end of the year. And then with these new executive team that will go board we’re really expecting to see some improved cost control and recoveries and that type of thing and really the timing of that deal depends more than anything probably on our ability to improve the performance of the company. Metal prices are not great right now but zinc is predicted to improve considerably over the next year or two. Copper is kind of volatile. It goes from being pretty good and pretty weak. And so that’s kind of the hit or miss deal. That IPO is really going to be result see an improved performance in this financial performance. And I’m still thinking that maybe in latter half the next year or maybe early 2016 probably the timing on the thing.

Operator

Our next question will come from John Curti with Singular Research.

John Curti - Singular Research

Kind of a follow up question on the international business, the stuff that's been done over the parts and there kind of digest maybe stage two in terms of the larger standpoint, the potential customers, how long do you envision them running their test maybe over a six to nine month period before they maybe tend to think about placing orders maybe sometime in 2015?

Nick Carter

It’s very hard to predict John. That’s not a bad estimate it could be less on average I would guess once they’ve ordered volumes large enough to try in their bulk equipment, they’re going to run for a period of time. You probably are not far off with that estimate?

John Curti - Singular Research

Were any volumes from them included in the second quarter numbers or will those be in the third and fourth quarters?

Nick Carter

That’s a good question I’m not sure if they showed up as deferred or is actually invoiced, because they might be in the deferred list, those three.

John Curti - Singular Research

With respect to Canadian oil spend, the customer still taking qualities above the contracted amount, how much longer do you think that’s going to last? And when does Phase 2 start for them? Late ‘15?

Nick Carter

Yes, obviously we have to be careful what we said about them John. As you know, it's their business right. But they’ve indicated that the phase 2 will start up in late 2015, but they will need volumes before then. So [indiscernible] et cetera. So they’ve indicated additional volumes in the first and second quarter for phase 2 as well.

John Curti - Singular Research

Are you talking with any additional customers in Canada in the oil sands area?

Nick Carter

Yes, we are.

John Curti - Singular Research

Are you like in that -- like the test phase now with anybody?

Nick Carter

A lot depends on how far along they are in their process, whether they are sanctioned or not sanctioned, et cetera, et cetera. But I think we're talking to everybody who is going to be mining kind of bitumen up there and using this process in our product too.

John Curti - Singular Research

And this is a relatively common process used by several different operators?

Nick Carter

Yes, it seems to be. All the mining guys, not the SAGD [ph] process. The mining guys use this technology. There are variations in the technology but they are all similar.

John Curti - Singular Research

For Connie, could you give me kind of the revenue dollars and volumes for domestic and international for the quarter?

Connie Cook

I can give you the -- for the quarter foreign dollars was $21.8 million and gallons was 4.65. So then if you just have four in total and you can just subtract that. Total for the quarter was 20.7 million gallons and then the total revenue was 72.8 million for product sale.

John Curti - Singular Research

Nick, you did four shipments in the quarter at AMAC. You still expect 8 to 10 for the year?

Nick Carter

Yes, some of those have been off in the second quarter due to some mechanical problems. That's part of the reason that the volume was down some but they’ve got a little visibility to make up some room on these production levels and we are still looking at least 8 and maybe closer to 10 by the end of the year. I don’t know if you’ve noticed John, but I touched the numbers that we talked about in this call were a little bit different than the original posted numbers that we came out with last fall, and they’ve been adjusted based upon what our production was for the first six months and what we're predicting the next six months is going to be. And so you need to careful and get right budget numbers as far as any kind of current production as going forward.

John Curti - Singular Research

The four shipments, two zinc and two copper, can you tell me how many metric tons of each were shipped in the first half of the year?

Nick Carter

I don’t have those numbers in front of me. I can’t on this call without looking, if that’s okay.

John Curti - Singular Research

I can circle back. The increased overhead, can you kind of give me an indication of what percentage or how much dollars that was and I'm assuming that will flow through to subsequent quarters because you’ve added all these people of…

Nick Carter

There is a couple of -- some of that was pretty much one-time deals. There was a write off of some exploration costs where we decided not to go forward any further with the spot they were working. And that was like $300,000 or $400,000. The extra personnel cost, I don’t recall off the top of my head what the dollar amount of that was but that has to do with people that were leaving, had to be paid off. There were some bonus situations and stuff like that and then trying to get the new people on board is always costly because you have to -- most of the time, you’ve banished [ph] people where they are in the process, getting their visas and so you’ve got some kind of overlap between the old people and the new people coming in and all that and all that to kind of stuff is going to be pretty much one-time expenses. So we did try to put more detail in our 10-Q and whenever that comes out in the next few days, you might read the section that we put in there and [indiscernible] a little bit about some of the ongoing -- going on in the second quarter. I don’t have some of those numbers in front of me. But we’ve got them and give this call people are sharing but there is a good information in 10-Q this time about that.

John Curti - Singular Research

The cash cost is still around $60 per ton of ore. Cash cost, anything going on with some of the non-cash cost that are being pushed around up or down much?

Nick Carter

Other than that, write off of some of the exploration work there isn’t anything else other than the typical depreciation, amortization.

John Curti - Singular Research

Connie, I would assume then there was a small operating loss at AMAC, because you got that non-cash adjustment [indiscernible] in the quarter.

Connie Cook

That accretion, correct

John Curti - Singular Research

And I’m assuming that then the loss was basically driven by the write off of exploration cost?

Connie Cook

It was all the reasons that Nick has stated, the lower average metal pricing, higher overhead costs and then also that write off. The write off ended up being around $400,000. It wasn’t a huge impact but….

John Curti - Singular Research

How much lower were the average metal prices year over year?

Connie Cook

Did you know that Nick?

Nick Carter

No, not off the top of my head. I’m not in my office.

Operator

Now we head to Tom Harenburg with Carl Hennig Incorporated.

Tom Harenburg - Carl Hennig Incorporated

Good afternoon, certainly a great quarter on the petrochemical sides. Connie, the deferred sales volume, I missed that figure. Could you tell me what that was?

Connie Cook

I sure will, let me get that number right here for you. You wanted volume you said.

Tom Harenburg - Carl Hennig Incorporated

Yes.

Connie Cook

Hard sales volume that was deferred was 2.3 million.

Tom Harenburg - Carl Hennig Incorporated

2.3 million, okay.

Connie Cook

And it was $8.8 million in dollars.

Tom Harenburg - Carl Hennig Incorporated

Thank you. I’m perplexed here on the decline in metals prices because according to today’s Wall Street Journal copper a year ago was selling at roughly $3.12 and Wednesday it closed at $3.23 actually, which shows an increase. And if I look at zinc, zinc was a year ago at 89.89329 and Wednesday it was a 114.937. That’s almost a 30% increase and yet you’re talking about decreases in metals prices. Can you straighten me out on that?

Nick Carter

Well, if you look at the chart over time, that copper price looks like Rocky Mountains, it’s up and it’s down, and it’s up and it’s down and the price that we’re receiving really kind of depends upon when the chip loads and then what month the customer chooses the price of the metal. This concentrate is basically sold on a situation where the customer has two or three months going forward to fix the month of price, average price that he pays. And so the customers will pick what they think is the low point of the prices. And with copper bouncing up and down like it kind of plays into the buyers' advantage. Now we do try to hedge when we load the ship but if we’re loading the ship in a low point, we may hedge it the wrong time or we may think well, copper predicted to go down. So we go ahead and hedge it and it turns around goes up and it’s been very volatile on the copper side and of course that’s great deal of the revenue off the thing. Zinc has been predicted to be increasingly better over the next couple of years and they’ve been liking that production the last year so, and it’s probably little more predictable and we’ve not hedged it because the outlook has always been for better prices going forward but that doesn’t mean that we’ve always got exactly the best price from these things. We're getting better at playing this game compared to last year, prices were a little more predictable than what they had been this year and that’s the reason the results haven’t been as good. We haven’t hedged it right and thankfully we’ve handled the weaker prices.

Tom Harenburg - Carl Hennig Incorporated

But going back to the deal, [indiscernible], it seems to me that zinc needed to be $0.57 to break even and copper needed to be I think that was $1.10 and those prices are substantially above those levels.

Nick Carter

And costs are too.

Tom Harenburg - Carl Hennig Incorporated

Okay, so you had a considerable increase in cost over what were originally projected.

Nick Carter

A lot of that original feasibility study has been pretty accurate, I haven’t spent a lot of time looking at the prices and the cost that they’ve predicted and all that because just we knew that was original study that was done 20 years ago, a bit too much attention to that but as far as the ore grades and recoveries some of that kind of stuff, the feasibility study has been pretty accurate. You put that into the modern environment with the current prices and current cost and the fact that the mining industry in general is not doing very well, kind of tells you that probably it’s not the best environment for mining industry right this minute.

We've got [indiscernible] in Saudi Arabia that a lot of people don’t have, like the cheap piece of fuel and so our transportation cost within the country are pretty cheap. Operation costs are pretty cheap compared to a to a lot of people – generators which use diesel, we're getting fed with cheap material, some of that kind of stuff and we just on the fact that we’ve got some improvements to make from. We are not moving the – metal target and is it run or have been supposed to and that’s a potentially considerable bid income there. It's been down from what they should be or down that and some places to improve it due to economics even in the downturn of the [indiscernible] economics.

Tom Harenburg - Carl Hennig Incorporated

Do you feel going forward for the second half of ’14 that AMAK can contribute to the bottom line of Trecora?

Nick Carter

Well, we are pretty optimistic that this new crude that we got and there is going to -- well there's some low hanging fruit that we're hopeful that they will be -- that will get an operation get to recoveries better, probably get more efficient with their chemical usage, which is very expensive, some of that kind of stuff and first metal circuit hopefully is operating before the end of the year. That's going to be big one, some of those kind of things. So yes I’m certainly optimistic that we're going to see some production for the end of the year as far as –

Tom Harenburg - Carl Hennig Incorporated

So, the richest vein as that further vein that you are looking to get to. Where do you stand on it? You feel it will be there by the end of the year?

Nick Carter

Yes, I think so. They are making progress on the development. The second orebody is in line as for the development and they have been working on getting into the third one. And the other thing about that third orebody though, it's high in concentrate or unit and you know we have been monitoring the [indiscernible] circuit to be able to handle -- or potential -- some of the improvements that we're making is to make sure we get the tag removed from the product for that. It's a penalty as far as the market. So it’s competitive business, tough business.

Tom Harenburg - Carl Hennig Incorporated

Okay, so would you see that the second orebody is a lower grade than the first orebody was?

Nick Carter

Little bit not much more.

Tom Harenburg - Carl Hennig Incorporated

Not much, notational okay.

Nick Carter

Potentially different. All three of them are different. They are different in the mix and they are different in the quality of the ore but basically when we eventually get the third one, the well, we can get in there and mine it on a regular basis. What they'll be doing is running a blend of all three. That's how you get the most value out of those things. You get the best recoveries by running a consistent brand to your mill and you can get your recoveries fine-tuned by having a more consistent feed to the mill.

Operator

(Operator Instructions) Moving on to George – with Private Investor.

Unidentified Analyst

Nick, just a follow up on the mining, talking about orebody 2 and 3, as you are moving into the skew and is there class per ton of change from the initial orebody in terms of costing it out as you are moving?

Nick Carter

No, not significantly. It’s about same. The distance being travelled all that is not much different from one to the other.

Unidentified Analyst

Okay, and as far as which you are looking at on the third orebody we think that would be parallel to what you’re experiencing up?

Nick Carter

Yes, it’s not. Several hundred yards [indiscernible] where we're at operating right now. So it. It is significantly removed from the others so that it would cost much more to get the ore out and to the mill

Unidentified Analyst

Okay and questions on the refining side volume. Can you state -- give us some color on the volume going into Canada on a gallon basis how do your quarters that you are reporting on?

Connie Cook

I don’t think that we’ve ever broken it out that way.

Unidentified Analyst

Okay, and that

Nick Carter

We don’t do that George, because we got to protect our customer there.

Unidentified Analyst

Okay, I got you. Now, let’s consider the international numbers have great [indiscernible]

Connie Cook

We consider U.S. domestic only.

Unidentified Analyst

Okay, alright. And then moving forward on your expansion program, is there a transition plate that you see in time where you really start seeing construction of what you have on the equipment order side now? Is it possible that you could be up and accomplishing this in early fourth quarter or is that too ambitious to be looking at?

Nick Carter

I think early first quarter of next year is probably closer. We expect some distillation towers to be delivered by the end of next month, end of August. So some of the big equipment we’ll start showing up, pretty soon.

Unidentified Analyst

Okay, all right. And then just swinging back on the AMAK. In terms of what you’re carrying as you’re investment, can you relate again the most recent transaction involving [indiscernible] by anyone and was there anything in that quarter June that you could relate to that took place and based on that or the most recent transaction, what is the value of your investment on the basis of that?

Nick Carter

Go ahead.

Connie Cook

Well I was just going to say as far as I know, the last transaction was last year second quarter and we did the revaluation at that point. I don’t know that there's been anything since then, has there Nick?

Nick Carter

No, that transaction was done $8 of share of AMAK there's [indiscernible] million shares of outstanding. That was an internal equity raise for all shareholders -- $8 a share.

Unidentified Analyst

Okay. And your percentage of interest at this point is about 34 right?

Connie Cook

35.25.

Unidentified Analyst

35.25, okay. All right, and then looking a little color back overall in the third quarter relative to the second quarter, do you feel comfortable that you can keep in view a similar type earnings number for the third quarter?

Nick Carter

I think on the petrochemical side, things look pretty good. Obviously we don’t give guidance George. But one of the issues that we're having to wrestle with is railcar availability. We’ll have 50 additional rail cars by the end of the year and we have one of our large customers trying to find railcars where FTUs on their behalf, that might be the limit on volumes in the third quarter.

Unidentified Analyst

And what’s your railcar total currently?

Nick Carter

We are approximately 225 at this point is what we have.

Unidentified Analyst

225, and those are available to you at all times?

Nick Carter

Yes, but sometime it’s a long turnaround. It’s got to go to Canada and comeback.

Unidentified Analyst

Yes, you’re right about that. So additionally your acquisition is for an additional 50 by the end of the year?

Nick Carter

Yes. We have more coming on late next year.

Unidentified Analyst

Okay. And are those put the start rate or are those some kind of rental agreements

Nick Carter

We lease them.

Unidentified Analyst

You’re leasing then, okay. What kind of up length is the lease established for?

Nick Carter

It depends. Right now they’re looking for fairly long leases right, because demand is high. We generally don’t go for less than I think five years, right Connie?

Connie Cook

Right, five years typically the shortest

Unidentified Analyst

Okay. And then one technical question on railcars. In terms of what you’re seeing there, new standards coming out in the United States and maybe that’s more to bring crude down out of North Dakota but the weight of the car and the strength is the metal, are you seeing that in any requirements in terms of car composition currently versus what it has to be going forward? Is your product point of view, do you see changes?

Nick Carter

Yes, there are some. A lot of the railcars we have are in compliance because our step has been volatile all along right? The issue with the crude oil is that is changing from heavy step, not very volatile to the back end material, which is a number, fairly large percentage life in it. So there will be some impact on us and we work with the companies to release cars from -- if we do need to phase them out, we phase them out and replace them. And think the DOT is allowing time to be, for that to happen, especially backend crude though.

Operator

(Operator Instructions) We’ll hear again from John Curti.

John Curti - Singular Research

Yes, I have a follow up on the petrochemical side in terms of utilization rate in the third and fourth quarter. You’ve bumped it up pretty good in the second quarter, third quarter is usually very strong and then it down a little bit in the fourth. How are you doing with respect to -- capacity and you’re ability to maybe continue to put some away or additional demand deploy and sum up in the early part of 2015. I realized maybe you’re looking to may be do some of the stage expansion. But is there opportunity to maybe lease them storage on short term basis if needed?

Nick Carter

It's definitely a possibility. We do have a small amount of money in this budget to add to our tankage at [indiscernible]. But we are also looking at customers overseas who would like bulk shipments rather than iso-containers in which case some kind of storage near the water would be very helpful. So these are all things that are under consideration John. The economics of doing that are difficult though because you ship the material to the tank and then you got to pay a tank rental fee and so on and so on. So the economics are not exactly straight forward, but we're certainly thinking about it and trying to find a way to make that work for us.

John Curti - Singular Research

You mentioned now possibly -- some of the foreign customers wanting bulk shipment. How does that differ from the iso-containers and is it more or less expensive to ship the product or more or less difficult to do it in that fashion?

Nick Carter

It's a combination. Iso-container, we put a nitrogen blanket on the iso-container, the product purity stays consistent from us all the way there. When you've put it into a cargo hold which is the only way you can do a bulk shipment, you have other people handling the product and it increases the risk of contamination et cetera. But I mean these shipping companies do this with a lot of chemical. So generally they can handle that side of it.

So the fright per gallon of product shipped is lower by our bulk shipment. If you've got the additional costs of the storage at both ends. So it's a complicated economic study to be able to make very clear decisions about which is the best way to go. The reason the guys want bulk shipments is their view is that it's cheaper. But I think you heard us mention a couple of times that we can ship an iso-container to the Middle East for less than we can ship a truck to New Jersey and certain parts of Asia Pacific that iso-container shipment price is significantly lower than shipping to New Jersey. But there, as I have laid out there, a bunch of factors that impact it.

John Curti - Singular Research

Well, the shipping in bulk would even be less than shipping by iso-container?

Nick Carter

Yes. If you look at pure freight side of it. But then you have the storage at both ends as well that you got to factor in.

John Curti - Singular Research

As well as the potential for contamination?

Nick Carter

Yes.

John Curti - Singular Research

That’s something that’s of your hand?

Nick Carter

Yes, exactly. But they do, do this they do it for lot of chemical. So they trace the purity as it comes out of our tank -- our short tank should we have such a thing -- into their vessel. They trace it all the way there and then they trace it as it comes out of the ships. So there are a lot of procedures in place to manage it, but it’s just, if it does, it could become out of our hand.

John Curti - Singular Research

So it is possible though that you might look to require and or at least bulk storage tanks on the go to handle some of this shipment, probably?

Nick Carter

Yes. We are thinking about it.

Operator

Ladies and gentlemen we have no further questions at this time. Mr. Carter, Mr. Fowlds, I’ll turn the conference back to you for any closing or additional remarks.

Nicholas Carter

Yes. Thank you. Operator I’d like to close by thanking all our employees for the hard work they’ve produced and results like we had this quarter. Company success is truly a team effort and we try to really emphasize their effort with our Company. We appreciate all the interested parties’ participation in this call today. We know everybody’s time is valuable and hope you’ll join us for our next call. We also hope that you see the unrecognized value in our stock and will continue to follow our progress. We're really excited about the future of the direction we’re going. And we hope that that it comes through with all the information we’ve provided. And with that, thank you for joining us and we’ll see you next quarter. Thank you.

Operator

Thank you, Mr. Carter. Again, ladies and gentlemen, that does conclude our conference for today. We thank you all for your participation.

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Source: Trecora Resources' (TREC) CEO Nick Carter on Q2 2014 Results - Earnings Call Transcript

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