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Executives

China Direct Industries, Inc.

Andrew Wang – CFO

Richard Galterio – VP

James Wang – Chairman and CEO

Analysts

Amit Dayal – Rodman & Renshaw

Joe Howitz [ph]

Aaron Kutcher [ph]

John Matthews [ph]

China Direct Industries, Inc. (OTCPK:CDII) F2Q2011 Earnings Call Transcript May 16, 2011 4:30 PM ET

Operator

Welcome to the Second Quarter and Fiscal 2011 Earnings Conference Call for China Direct Industries’. For those of you who maybe new to the company, China Direct Industries trade’s on the NASDAQ global market under the symbol CDII.

China Direct Industries is a U.S.-based holding company with operations in China and the U.S. focusing on pure magnesium production, distribution of basic materials and ores, and cross-border corporate advisory services.

Headquarter in Deerfield Beach, Florida. China Direct Industries have a unique infrastructure to provide a platform to expand business opportunities globally or effectively, inefficiently assessing the U.S. capital markets. For more information on the company, please visit its website at www.cdii.net.

Our call today is hosted by Mr. Andrew Wang, CFO; and Richard Galterio, Vice President. Additionally, Dr. James Wang, CEO and Chairman will also be available during the Q&A session that will follow management’s discussion of the second quarter ended March 31, 2011.

At this time, I would like to refer to the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. During this conference call, management may discuss financial production, information or expectations about the company’s product or market, or otherwise makes statements about the future, which statements are forward-looking and subject to a number of risks and uncertainties, that could cause the actual results to differ materially from the statements made. These risks and uncertainties are detailed in the company’s filing for the Securities and Exchange Commission, included in its most recent Form 10-K filed on December 23, 2010.

At this time, I would like to introduce Mr. Richard Galterio, Vice President of China Direct Industries. Mr. Galterio, you may now begin.

Richard Galterio

Thank you, Operator. And all of you who are joining us for our second quarter fiscal 2011 conference call. I’m pleased to announce that China Direct Industries reported revenue of $88 million for the first six months of fiscal 2011 ended March 31, 2011, up 93% from revenues with $45.6 million recorded in the first six months of fiscal 2010.

Net income attributable to China Direct Industries for the first six months was $3.5 million, improving significantly from $673,000 recorded in the same period in fiscal 2010.

Net income attributable to common stockholders for the first six months of fiscal 2011 was $2.8 million, inclusive of approximately $720,000 in non-cash items related to our Series A preferred, compared to net income of $612,000 in the same period for fiscal 2010, inclusive of $60,000 in Series A preferred related non-cash items.

We reported earnings per basic and dilutive share of $0.08 for the first six months of fiscal 2011, compared to earnings per basic and dilutive share of $0.02 reported in the same period in fiscal 2010.

For the second quarter we recorded $42 in revenue for March 31, 2011, up 80.8% when compared to $23.4 million for the second quarter of fiscal 2010. Net income attributable to China Direct Industries for the second quarter of fiscal 2011 was $6,400, inclusive of $864,000 in depreciation expenses, mainly related to our magnesium segment, as well as a $264,000 in our realized book from the sale of security.

This compares to the net income attributable to China Direct Industries of $1.7 million in the second quarter of fiscal 2010, inclusive of gain of $2.1 million from the sale of security, partially offset by $584,000 in depreciation related costs. This resulted in second quarter net income per basic and dilutive share of zero cents, as compared to $0.06 in the second quarter of fiscal 2010.

We continue to see revenue expansion across all of our business segments in the second quarter of 2011 and first, in our magnesium segment, we have witness five consecutive quarters of double-digit growth in revenue.

In the second quarter of fiscal 2011, we delivered 9100 and 9400 metric tons of magnesium, a 118% increased from the shipping volume in the second quarter of fiscal 2010. It’s important to note that, what is traditionally our weakest quarter for this segment, we delivered about the same tonnage as we did last quarter, which is traditionally our strongest quarter.

While we experienced the negative impact of government imposed power restrictions and some higher input costs related to despite ferrosilicon prices last quarter also related to that government imposed power restrictions.

We do not foresee any further lingering effects from those issues moving forward into the second half of fiscal – of this fiscal year. We anticipate that we will continue to see positive trends for the remainder of fiscal 2011 as prices and demand are continue to firm in the first month of our third quarter.

In our consulting segment, we had a strong quarter compared to the second quarter of fiscal 2010. Our revenue was up 30% to $1.6 million and we are in various stages of negotiations with professional new clients to further bolster our revenues in this segment as we move forward throughout the year. We are confident that this will lead to new client contract and transactional revenue in the second half of this fiscal year.

We continue to see significant improvement in our basic material segment with overall revenue reaching $16.4 million, up 33% from the second quarter of fiscal 2010, growth which fueled by sales of steel bars in our CDI Beijing subsidiary where revenue was up 187% from the second quarter of fiscal 2010.

We anticipate continued strength in CDI Beijing’s performance as we supply construction products under previously signed distribution agreement. Additionally, the commencement of iron ore distribution from our U.S.-based trading subsidiary contributed to growth and revenue.

We believe these operations had a significant impact on our performance in the second half of this year, which I will discuss later in this call.

Revenue from our chemical facility was down slightly driven slow – due to slower than expected sales from the launch of new specialty chemical products.

Gross profit for this segment increased compared to the second quarter of 2010 with gross margins reaching 7% versus 5%.

As we move forward into the second half of fiscal 2011, we witness dramatic improvement in our end markets in magnesium, as well as improvement in all of our operations. Our topline performance is accelerating and we have been executing our strategic initiative to greatly improve our bottom line performance.

As we work to further improve performance in the coming quarters, I would like to emphasis several key factors which we believe will help us to continue to accelerate our growth in fiscal 2011 and beyond.

First, we continue to execute on our plan to become the worldwide leader in the production and distribution of pure magnesium, and related products through our aggressive consolidation and acquisition plan. After acquiring an 80% control interest in Ruiming Magnesium in the fourth quarter of fiscal 2010, we recently acquired remaining 48% interest in Golden Magnesium making it a wholly-owned subsidiary moving forward.

Second, with government power restrictions behind us and a stronger global demand except for [ph] magnesium, we restarted production at Chang Magnesium late in the second quarter and we have recently restarted production at Baotou as well. This will significantly increase our overall production capacity, which we anticipate will lead to much stronger operation results for this segment moving forward.

Third, we have begun distributing iron ore from Mexico into China and we are in preparation to begin distribution from Bolivia as well, which we believe will begin late in the third quarter. We believe it will be an important driver of growth for the future, taking advantage of our capabilities in China while creating a U.S.-based profit center.

Fourth, our marketing efforts in China for our consulting services have yielded several potential new client opportunity for services and transactional revenue and we anticipate signing additional clients in fiscal 2011 upon completion of negotiation.

And fifth, our balance sheet continued to strengthen with over $20.6 million in cash and prepaid expenses, along with over $45.2 million in working capital. This compared to $18.6 million in cash and prepaid expenses, along with working capital of $30.3 million at the end of September 2010. We continue to have negligible long-term debt as well.

As we move into the second half of fiscal 2011, we will continue to execute on our strategy of being global leader in the magnesium industry as we work to build core aspects of our consulting services, basic material distribution and trading operations.

I will now like to turn the call over to our Chief Financial Officer, Mr. Andrew Wang to discuss this quarter in more detail. Andrew?

Andrew Wang

Thank you, Richard, and welcome everyone. For the second quarter of fiscal 2011 ended March 31, 2011, China Direct Industries recorded consolidated revenue of approximately $42.3 million, up 80.8% compared to revenues of $23.4 million recorded in the second quarter of fiscal 2010.

Growth profit in the second quarter was $3.2 million, a 61.7% improvement over the $2.0 million in growth profit recorded in the second quarter of the fiscal 2010. We recorded the net income attributable to China Direct Industries of $6,400 inclusive of $864,000 in depreciation expenses mainly from our magnesium segments as well as $264,000 [ph] in a realized loss in the sale of marketable securities. This compares to income of $1.7 million for the second quarter of fiscal 2010, inclusive of a gain of $2.1 million for the sale of marketable securities partially offset by the depreciation of $584,000.

Our net income attributable to stockholders resulted in a basic and diluted income per share of $0.00 for the second quarter of fiscal 2011 on 34.7 million weighted average shares outstanding. This compared to net income of 0.06% per share recorded in the second quarter of fiscal 2010 on 28.6 million weighted average basic shares and 29.1 million diluted shares.

For the first six months of fiscal 2011, we recorded revenues of $88 million and net income attributable to common share holders of $2.8 million. This compared to revenue of $45.6 million and net income applicable to common share holders of $612,000. Our earnings per diluted share in the first six months were $0.08 or 33.3 million weighted average shares as compared to earnings of $0.00 per diluted share on 20.4 million weighted shares in the first six months of fiscal 2010.

Well, this result demonstrated significant overall improvements of stocks in fiscal 2011. We see the underlying trends laid the groundwork for further improvement in the coming quarters.

Looking at our magnesium segments, we continued to see with the significant improvements in overall demands in both domestic and international markets. For the second quarter of fiscal 2011, revenues from our magnesium subsidiaries was $24.3 million, 148% improvement from the $9.8 million recorded in the second quarter of fiscal 2010.

We shipped 9,194 metric tons of magnesium products, an increase of 118% compared to 4,250 metric tons shipped in the second quarter of fiscal 2010. Revenue and growth formed a double digit of five consecutive quarters and remained worry to us in the second quarter, which is traditionally our weakest quarter.

As priorly noted, several short-term factors including power restriction imposed by the government, dating fiscal 2010 calendar year controlling constrained production, forcing us to fuel orders like profitable distribution and caused us spike in ferrosilicon prices (inaudible) production margins as well.

We also have significant higher depreciation expenses relating primarily for reflect position of our Ruiming magnesium subsidiaries. These factors result in our magnesium segment generating an operating loss of $439,000 inclusive of depreciation expenses of $864,000, with a significant portion that depreciation recorded at our Ruiming Magnesium.

Revenue from our resulting segments, consulting segments of (inaudible) increased to $1.6 million in the second quarter of fiscal 2011, up 30% from $1.2 million recorded in the comparable second quarter of fiscal 2010.

Operating income was $217,000 compared to a loss of $641,000 recorded in the second quarter of fiscal 2010. Both revenue and net income reflects an improved demand for our services as well as addition of a transactional revenue of recently added client. Revenue in our consulting segments invariably formed the level of service, transactional event and addition of new clients.

Our basic material segment revenue totaled approximately $16.4 million in the second quarter of fiscal 2011, an increase of 33% compared to $12.4 million recorded in the second quarter of fiscal 2010.

Our basic materials segment generates a growth profit of $1.1 million in the second quarter of fiscal 2011 compared to $564,000 in the second quarter of fiscal 2010. This is attributable to a strong performance of CDI Beijing operations and the addition of the revenue from our CDI Trading subsidiaries.

CDI Beijing record a revenue of $3.9 million, up 187%, compared to $1.4 million in the same period of fiscal 2010. CDI Trading generated $2 million for the second quarter of fiscal 2011. Our basic material segments generated operating income of $317,000, up 84% compared to a net income of $172,000 in the second quarter of fiscal 2010.

And with our magnesium segments, the overall business trends are strengthening for this segment. We continue to work to grow our distribution operations in China and our U.S. based trading business.

From an overall balance sheet perspective, we remain well positioned for the future growth. We added the second quarter of fiscal 2011 with $20.6 million in cash and prepaid expenses along with over $45.2 million in working capital. This is compared to $18.6 million in cash and prepaid expenses along with working capital of $30.3 million as of September 30, 2010.

In summary, we are very pleased with improvements in our various business segments and we believe our businesses were improved significantly in the second half of fiscal year, 2011 especially from a bottom line standpoint. We are now in the early stages of implementing our enterprise-wide financial software system that we initially plan to roll out (inaudible) at the end of fiscal 2011.

We, in fact, this is some work to enhance our management and reporting capabilities and standardize the processes and access to extensive and highly financial reports in our magnesium segment. We remained focus on improving our internal controls and positioning our operations to be more streamlined and focused in an effort to achieve significant margin expansion in our magnesium and chemical operations specifically.

We continue to believe our current staffing level appropriately at our facilities in China with exception of our magnesium segment. We are (inaudible) and adding staff appropriately. We will continue to look to reduce cost where necessary and opportunistically maintain inventory levels to help improve margins, customary to our level of business.

Our balance sheet remains strong and we believe we are well positioned for continued growth. We continue to evaluate and activate our strategic initiatives for the future as we look to grow our businesses including ongoing utilization [ph] of production of our Golden [ph] magnesium production facilities as well as the further consolidation of our magnesium operations as previously discussed.

At this point, I will return the call back to – over to Richard for some closing comments. Richard.

Richard Galterio

Thanks Andrew. Our results for the second quarter of fiscal 2011 reflect significant improvements in revenue across all of our business segments. Additionally, as our top line revenue increases and factors that affected our bottom line performance abates [ph], we are poised to achieve strong overall growth in the second half of fiscal 2011 in all of our businesses. Our end market in magnesium and basic materials computer segments continue to improve as our prospects for consulting continue to grow.

We are focusing on our efforts on improving results from operations and we believe that has begun to serve in our basic material segment and will be evidenced in our magnesium segments in the second half of this fiscal year.

While we still experience some short-term obstacles in our magnesium segment in the first half of the year, we maintained double-digit sequential revenue growth in traditionally our weakest quarter with our operations yielding positive results prior to depreciation expenses.

Our magnesium customers in various industries including steel manufacturing, aluminum alloy, and fuel production are strengthening and we believe we can capitalize on this through our facility restart, as well as our consolidation plan.

Our efforts in consultant have it on its strong growth track and we are confident that we will add additional clients and transactions in the coming quarter. Our basic material segment continues to grow with CDI Beijing leading the way a solid performance from our chemical operations. And the emergence of the U.S. based revenue stream from our CDII Trading subsidiary.

We are confident that our company is in a position where further gains in our business should low through noticeably through our bottom line performance. As we look at the second half of fiscal 2011, we anticipate a market improvement in our overall bottom line performance, as we reach economy [ph] the scale in magnesium and expand our trading and consulting operations.

Our future success will be dependent on several key factors. First, we're aggressively working on the restore of productions through our facility both Delco [ph], which is ramping up now and Chang Magnesium, which began its ramp up in Q2, as well as Ruiming Magnesium, which is our new subsidiary we acquired last year.

Changxin [ph] facilities should help us to continue to drive revenue growth, but more importantly improve our utilization rate and profit margins. We intent to look opportunistically to acquire raw material to further help to improve margins and we believe demand trend should leads with sustainable and stronger piping environment.

Second, we intend to substantially increase revenue from our U.S. based trading operations, as we shipped ores from Mexico and South America into China. I am please to inform you that we completed a second shipment of approximately 20,000 metric tons of Iron Ore, our largest shipment to-date from Mexico as of today. We anticipate making additional shipments from Mexico and initiating shipments from Bolivia beginning in the second half of this fiscal year.

This will help to build a very profitable and growing revenues stream based in the U.S. while taking advantage of our capabilities in China. Third, we are in negotiations with potential consulting clients to perform services and transactions, which we believe will further strengthen our revenue growth in this segment in the coming quarters.

Lastly, we are in the final stages of entering into a contract to sell our interest in PanAsia magnesium leading to the recapture of a significant portion of our investment in those PanAsia facilities.

As our top-line performance has increased substantially and we believe certain short-term factors affecting our bottom performance are potentially behind us. We see a strong second half enabling us to reach the build we have set forth in fiscal 2011.

Management still sees our net income for China Direct Industries being $12 million. But now these are revenue ranging from the original $180 million we discussed last quarter, to a range of $180 to $200 million.

In closing, I would like to emphasize that we are working diligently to achieve or even exceed our goal. And we are confident that we have the right plan in place to deliver in all of our business segments.

We remain committed to becoming the worldwide leader in magnesium distribution, while we built a gross revenue stream, centered around a dynamic growth taking place in China. So, enable our company to achieve sustainable growth for the future.

Allow me to thank you all again for joining us on this call and now operator you can please begin the formal Q&A

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Amit Dayal from Rodman & Renshaw.

Amit Dayal – Rodman & Renshaw

Thank you. Hi, Richard. In regards to the cash flow Richard, could you just walk us through some of the key line items over the, I don’t see this in other part of your press release, yet also which is 10-Q yet, if you can just give us some color on cash flow in the second quarter.

Richard Galterio

Andrew?

Andrew Wang

One more time Amit.

Amit Dayal – Rodman & Renshaw

I was trying to get some color on the cash flows for the second quarter, I don’t see that as a part of your press release, just walk us through some of the key items over there?

Andrew Wang

Yeah. Maybe if you would like, maybe you can give me a call after the conference or maybe I can give you going over the cash flow. Yeah, the cash flow from the operating sense by end we are, I think it’s like using operation about $7 million and then would you – basically we have – probably have used in the investing and also by financing. So, our total cash flow is negative about I think about 700,000. you going to get a specific, please give me call after the conference.

Amit Dayal – Rodman & Renshaw

Okay. That’s me.

Andrew Wang

Yes. I mean, we basically had $10 million in cash versus $9 million in change in comparably from the end of the quarter. We did ramp up our inventory it’s pretty substantially for magnesium. So, we use, which we use them cash to increase our inventory since September by over $3 million because we’re starting to finance larger levels and we give you an inordinate amount of cash then we would normally used because of our distribution operations things were linked heavily on a distribution side, because of our production facilities not being available to us.

We, out of the ramp of that we had in our magnesium revenues, almost all of this resulted out of distribution instead of production and in a rising price environment where we ran into smart market size our profit margins were very low there, so we had higher utilization rate of cash at that point in time and we were sort of spinning that money around more so then we were making a lot of money on it, if we were in production, but now with us being in production and that’s having those inventory in place and building further inventories we think that cash will number should start to improve certainly late in the third quarter and into the fourth quarter.

Amit Dayal – Rodman & Renshaw

Okay. When can we expect to see the 10-Q filed?

Andrew Wang

It should be out any minute?

Amit Dayal – Rodman & Renshaw

Okay. Thank you. In regards to the profitability of the business Richard, can you talk about why the volatility continues to persist, I mean…

Richard Galterio

You know, it's a great question and unfortunately in this particular quarter where you had our revenue ramping up dramatically, as I said the government shut down affected two item, first of fall in November and into December of 2010, pure steel priced up dramatically, because the power restriction affected any energy producing areas and because there are steel comprises, why not that affects you in a lag part, because you’re buying those raw material and then you’re creating them into magnesium so we’re competing in December it's going to affect you more in January and February then it is exactly in December.

So, November affected us in near end and December and the December affects us in January. So, those inter cost for production but also our facilities at Chang and Delco were basically down and our restore starts that we were affectively starting didn’t equates because of the power restriction. So, all of these sales that we’re grown are literally we had it stock market buy and do trading about them. So, in an area where we would have hoped for our margins it start to expand the driver 6% to 7%. We really had margin compression, we didn’t really, we were basically put in product around this as order.

The good part about that scenario is, as said we shipped 91,000, almost 92,000 metric ton by way of comparison last quarter, which is traditionally our strongest quarter, we shift 93,000 metric ton steel. We didn’t even see any forelock in demand in the quarter that has the Chinese New Year and we lose three or four weeks. So, demand is accelerating, prices, our average price increase from 2310 to 2610 and prices grown even further in the first quarter.

So, we see with the short-term problem should lead to further acceleration and magnesium moving forward, plus the depreciation is set at around your low utilization rates so when Delco was in operational and Chang was essentially shut down for a month or two, as a results of it we are not gaining any benefit from those facilities, yet we are carrying all the costs associated with them in write-downs of plant, property, equipment etc.

And it causes an anomaly that we do not believe will be the case going forward. So certainly we are making these acquisitions, the 100% acquisition of Golden, the acquisition we have made of Ruiming and some of the things we have moving forward because we believe the industry is turning around dramatically. The revenues, I think that we have, should indicate that the question that I am sure is the $54,000 question and we turn this around to the kind of profitability we had in 2007 when magnesium was doing quite well.

We believe we can and we believe that Delco will start to show itself in the second half.

James Wang

I mean the case (inaudible) that is magnesium per price goes to 20 – $900 (inaudible). That will give us consistent, a proper marking, (inaudible) 2500 to 2600 extreme measures pretty even into our plant manufacturing. So what’s happening is also into our consulting segment, this business, as you know, is pretty much, I mean, (inaudible). So for coming quarter we have made large earning for this segment and the Latin (inaudible) we are working under basically material segment, you know, basically which half would increase our earnings basically material segment to probably round about $700,000 to several million dollars.

So if that can happens then we are able to – as we would be able to adjust our revenue and net income. If that happens our (inaudible) shipment would probably to balance our earnings (inaudible) so much, I mean, we have had a (inaudible). So it is our plan for the next six months. We also have finished our magnesium consolidation (inaudible) leverage our sale and increase our sale prices. That is another strategic growth to (inaudible) save time, you know, with basically (inaudible) several million dollars to pay for this kind of consolidation. It is part of a cash – on use of the cash for its magnesium consolidation.

Amit Dayal – Rodman & Renshaw

Right. Thank you. Just one last question, with regards to net income guidance you really haven’t changed it much, but so far for six months it has been around $3 million. So how – can you walk us through how we get to the $9 million for the – six months?

Andrew Wang

Yeah. Sure. I can walk you through that. First of all, we see probably a third of that coming out of basic material probably our trading and – we do believe that there is an potential upside to that. We shipped, as of today, another 20,000 tons. Our first shipment was 15,000 tons. We said that we wanted to get to monthly shipments which over the course of the next six months we believe could lead us especially to start shipping out of Bolivia which do think is in third quarter will ramp up over the course of the next two quarters to – along with other basic material companies to – you know about a third of the way home with that.

We do believe that our magnesium industry will probably be a third or greater of that as well, maybe more towards 40% and depending upon the nature of the services and the type of transactions that we do on a consultant side, that will bring us direct to the way home.

Certainly as magnesium used to ramp itself continues to move forward, as we get our profit picture in line with economies of scale, I can only, you know, have you look back at what we were doing in terms of margins back in 2007 and early into 2008 when prices were around 2900, 3000. With ferrosilicon input cost remaining relatively steady now, with increasing prices we should start to see margin expansion and that’s what we are going to start to seeing moving forward, and if we get some transactional upside in our consulting areas, I think we should do a little bit better that we definitely believe at this point in time we have a more diversified mix of revenue and a more diversified contribution in earnings over the course of the next six months than we have had pretty easily.

Amit Dayal – Rodman & Renshaw

That’s all I have. Thank you.

Operator

Thank you. Our next question comes from Joe Howitz [ph], who is a private investor.

Joe Howitz

Yes. I have a question about three months – just on the contingencies we saw that yesterday – can you comment – when you think the stock price will be going up (inaudible) this year – the projection that you have?

Andrew Wang

If I had a crystal ball to tell you that I would be a very happy guy. Unfortunately, we from an FD standpoint and from a regulatory standpoint, it’s not our job to comment on the stock market. I certainly can comment on anyone’s desire to buy or sell a particular security or I can say that we are working very hard to reach our goals, and if we do reach our goals and our business performs eventually then it will translate into the stock price. So we are very working very diligently to make that happen and we are very hopeful that it will. Thank you.

Joe Howitz

Yeah. I know. I just want to find out pretty much because of this on the confidence you showed that you have on this quarter I am just throwing that question pretty much. The second question that I have with you, what is the biggest expense that you have in terms of the operation now?

Andrew Wang

Well, our biggest expense came out of magnesium and our biggest expense was probably the purchasing of stock price magnesium in this quarter, and unfortunately we would wish that we would have been able to spend a lot more dollars on the production side as we would probably have need a lot more money.

So right now the expense in terms of where we are putting our dollars has been on the magnesium side on for selling orders. The good part of that equation is the order to expanding our delivery – going up and now it's incumbent upon us to start turning back into profitable dollars, moving forward, which we are starting to see happen and we think it's going to start averaging itself much stronger in the second half.

Joe Howitz

Okay. So pretty much the magnesium is the one that really – that’s where the money right now is going to?

Andrew Wang

Yeah, I mean, certainly we have been starting to inject dollars on the trading side in South America. That so far as turned out to be very profitable endeavor for us with our first shipment and hopefully our second shipment is now being done where we – two additional shipments, and we intend to grow that business and we are going to start investing resources continuously in that. And we think that will be a pretty strong driver of revenue moving forward, and our operations both in chemical as well our distribution business in china, we are going to devote resources to all of our businesses. And so, right now, magnesium is where the main dollars are.

Joe Howitz

I see. Okay. And then in terms of the scrap metal (inaudible) dry cleaning facility that you have, is it right now running to full capacity?

Andrew Wang

Excuse me?

Joe Howitz

The scrap metal recycling facility that you have, is it running in full capacity right now?

Andrew Wang

No. The scrap metal facility, one of our form consulting clients had a scrap metal facility that we did work with them in helping them inducing within their business and we work with providing – trying to provide some scrap metals to them, we do not have a scrap metal facility.

Joe Howitz

Okay. All right. – Hello? You guys can have my last question?

Andrew Wang

Sure.

Joe Howitz

My last coming question would be, the power restrictions that will happen, is it – do you think it will be happening again with development?

Andrew Wang

I think if it’s going to happen again, it will be five years from now because that was part of the Chinese government has a five-year plan for energy targets versus output, and that was at the very end of their five-year plan. So they had the lower energy use in order to meet their targets.

So, could it happen again, yes, but it is going to happen in the next five years now.

Joe Howitz

I see. Okay.

Operator

Thank you. Our next question comes from Richard Keller [ph], who is a private investor.

Andrew Wang

Hello?

Operator

We have lost that line. Our next question comes from Aaron Kutcher [ph] from (inaudible).

Aaron Kutcher

Hi, how are you going doing today?

James Wang

Very good. Thank you, Aaron. How are you?

Aaron Kutcher

I am doing just fine. Quick question, now, are you guys dealing – you guys said that you are dealing more in the space of magnesium right now? Are you dealing with any iron ore right now? Any deal towards it?

James Wang

We have been – in our CDI Trading unit, we have shipped iron ore out of Mexico to China and we continue to do those operations today. We do not – at this point in time, those are the operations that we had, in Mexico so far, we’ve also look to do shipments out of Bolivian and we are also working do some shipments hopefully out of Chile as well.

So, to the extent that we’ve been involved in iron ore that’s the extend that we’ve been involved so far and we are definitely trying to grow that business at this point.

Aaron Kutcher

Okay. Another question that I have for you is, are you guys investing any major dollars in pre production of pig iron ore.

James Wang

Actually, I’m familiar with it – the pig iron ore. We probably at this point in time, first of all, this point in time, we are not investing in anything in pre goods options.

Aaron Kutcher

Okay.

James Wang

It’s really not in our team plan in the foreseeable future to do so. As our business grows in that area, I can’t say what we are going two years down the line, but at this point now.

Aaron Kutcher

Okay. So, it deals directly with iron ore and making, at this point in time?

James Wang

Correct.

Aaron Kutcher

Okay. All right. Thank you so much.

James Wang

All right. Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from John Matthews [ph] who is a private investor.

John Matthews

Yes. Congratulations on your nice quarter.

James Wang

Thank you, John.

John Matthews

I was looking – I was wondering to know what the breakeven places on magnesium exclude in the depreciation, apart from old rates?

James Wang

I’d say while there are some valuable costs associated with that, it’s a good question. It depends on a couple of factors. First, it depends on the mix of production towards the distribution. Distribution historically, because you are buying more on stock prices and you are really not taking in any inventory on that, your margins are very well with that the good part about that equation is you are probably not going to lose any money during that, because company won’t make that much money.

On the production side your input costs are basically build in – are relatively non inflationary costs versus silicon which happens to down surround a little bit and certainly it has energy related components through it that change its expenses. In a normal environment, our input costs are pretty much in line or in some cases ahead of the industry because if some of the things that we do from a standpoint of grandless combustion and using rate gas as close to call.

But as input cost certainly vary in prices, vary on a top, historically, between 2300 and 2500s, which should be operationally breakeven with depreciation taken out of the game and if we are running at forward capacity in our facilities and our utilization rates will be up. That number might even be a little bit lower. So, with prices being where they are today and having picked up a little bit, it should be better margins for us for sure.

John Matthews

What are the prices that have been sold from China to the other place of the world?

James Wang

Very recently, the prices have been in a 2900.

John Matthews

What?

James Wang

Well, actually is though – we actually aware of, which we’ll file the Form 10-Q momentarily and we provide, actually the exactly the price on the average, in a price of metric ton and that’s what this past quarter was around 2600 and change.

And prices in the first month of the third quarter have increased. They’ve leveled down a little bit, but it should be a little bit higher from that standpoint right now. Now, we can’t obviously comment on what sales we’ve done, still far in this quarter. But, as we said previously, we are at second things to continue to strengthen from a standpoint of what we’ve been doing in terms of growth. We are adding production and we are not adding that production on to have it run it over. We are adding it onto just to increase we’ve added inventory. So, we would expect them to continue to grow from where we are now.

John Matthews

And as far as the contracts for magnesium about how far out you’d go and about what percentage of your sales are in that longer term contracts?

James Wang

We’ve intended to shy away from the longer term contracts. One of the reasons being in a rising price environment you would probably want to be more short-term and as evidenced by what happen to it in 2007, we did have long-term contracts and at the end of the day if they become unsustainable, it doesn’t matter whether they are long-term contracts. So, we probably don’t go out more than about 90 days or so.

Operator

Thank you. Does that answer your question?

John Matthews

Okay.

Operator

Thank you. At this time, we have no further time for questions. I’d like to turn the call back over to the speakers for any closing comments.

James Wang

Once again, we would like to thank you all for joining us on this conference call for the second quarter of fiscal 2011. We look forward to talking to you all about our performance in the third quarter and everyone at our company is working diligently to little more stronger second half performance and we look forward to talking to you about that in our next call.

Thank you very much and have a good day.

Operator

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

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