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Diana Shipping, Inc. (NYSE:DSX)

Q2 2011 Earnings Call

August 4, 2011 9:00 am ET

Executives

Edward Nebb – Head-Investor and Media Relations

Simeon P. Palios – Chairman and Chief Executive Officer

Anastasios C. Margaronis – President

Andreas Michalopoulos – Chief Financial Officer and Treasurer

Analysts

Gregory Lewis – Credit Suisse

Justin Yagerman – Deutsche Bank Securities, Inc.

Fotis Giannakoulis – Morgan Stanley & Co. LLC

Scott Malat – Goldman Sachs & Co.

Salvatore Vitale – Sterne, Agee & Leach, Inc.

Operator

Greetings and welcome to the Diana Shipping Incorporated Second Quarter Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Edward Nebb, Investor Relations Advisor for Diana Shipping. Thank you Mr. Nebb, you may begin.

Edward Nebb

Great. Thanks, Diego, and thanks to all of you for joining this morning for the Diana Shipping Incorporated 2011 second quarter conference call. The members of the Diana Shipping management team who are with us today include Mr. Simeon Palios, Chairman and CEO; Mr. Anastasios Margaronis, President; Mr. Andreas Michalopoulos, Chief Financial Officer; Mr. Ioannis Zafirakis, Executive Vice President and Secretary; and Ms. Maria Dede, Chief Accounting Officer.

Before management begins their remarks, let me briefly summarize the Safe Harbor notice, which you can see in its entirety in today’s news release. Certain statements made during this conference call, which are not statements of historical facts are forward-looking statements pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act.

Such forward-looking statements are based on assumptions, expectations, projections, and beliefs as to future events that may not prove to be accurate. For a description of the risks, uncertainties, and other factors that may cause future results to differ materially from what is expressed or forecast in the forward-looking statements, please refer to the Company’s filings with the SEC.

And now, let me turn the call over to Mr. Simeon Palios, Chairman and Chief Executive Officer.

Simeon P. Palios

Thanks, Ed. Good morning and thank you for joining us. The scenario for the dry bulk shipping market has continued to play out along the lines that we have discussed on previous conference calls. While demand today is stronger than during the worst of the economic downturn, it continues to lag behind the growth in supply. As a result, time charter rates remain under pressure especially in Capesize area.

Across the market cycles, Diana Shipping has continued to follow strategies that have made the company to remain profitable, sound, and in a growth mode despite challenging industry conditions.

Our chartering policies promote a balance-of-time charter maturities and therefore, a visible and predictable revenue stream. Currently, our fixed revenue stays at approximately 97% in 2011 and approximately 58% in 2012. We believe that we have built strong relationships with the industries’ leading charterers, making Diana Shipping a preferred partner in meeting their needs. Of the time charter contracts that we enter into since the start of the second quarter, three were with Cargill International and one with Hyundai Merchant Marine.

We have continued to maintain a focused balance sheet with high liquidity and minimal leverage. Our cash position at June 30, 2011 was nearly $376 million or about $30 million higher than the year end 2010. Long-term debt including current portion was $361 million compared to stockholders’ equity of $1.16 billion.

Our strategies have provided us with a predictable revenue stream and a strong capital base in an uncertain industry cycle. As a result we are positioned to seize upon opportunities created in the current environment. Specifically, we have continued our program of gradually adding to our fleet as market conditions permit us to acquire vessels at attractive prices.

Last month, we took delivery of the motor vessel Corona, renamed Arethusa, a 73,593-ton deadweight Panamax dry bulk carrier built in 2007 which we purchased for $29.990 million. With delivery of the Arethusa, our fleet now consists of 24 dry bulk carriers as well as two Newcastlemax newbuildings that are expected to be delivered during the first half of 2012.

Now, let me review some of the key aspects of our results for 2011 second quarter. Net income was $27.7 million for the second quarter of 2011 compared to $33.9 million a year ago. Time charter revenues was $64.6 million compared to $68.7 million for the same period last year.

The revenue comparison primarily reflected the decrease in time charter rates which averaged $30,597 for the 2011 second quarter versus $33,105 a year ago as well as increased off-hire days. These factors were partially offset by the revenues generated by the Alcmene, which was added to the fleet in November 2010.

We expect that the present industry environment goes primarily by the supply and demand imbalance will continue for the near-term. In such an environment, we believe that our balanced chartering approach, cash flow visibility, and solid capital position will enable the company to operate from a position of strength.

With that, I’ll now turn the call over to our President, Anastasios Margaronis, for a prospective of industry conditions. We will then follow by our Chief Financial Officer, Andreas Michalopoulos, who will provide a financial overview. Thank you.

Anastasios C. Margaronis

Thank you, Simeon, and welcome to all who have joined us in this mid-summer conference call. We hope not to disappoint you too much with more depressing news about the dry-bulk market. By now, you should have realized the powerful cyclical nature of the shipping industry, which not only creates a scary financial turbulence, but also presents tremendous investment opportunities for the astute financial observers of this industry.

The year started with the Baltic Dry Index at 1,693 and yesterday closed at 1,260. On January 4, the Baltic Panamax Index stood at 1,798 and yesterday closed at 1,481. The Baltic Cape Index started the year at 2,285 and has dropped to a rather depressing 1,775 on August 3.

Let’s look at macro considerations. This year we have been receiving mixed signals from the world economy. This is not very encouraging news as we require stellar demand growth across the whole commodity transportation spectrum, in order to absorb the flood of newbuilding scheduled to join the bulk carrier fleet over the next couple of years.

The IMF expects the Euro area to grow 2% in 2011 followed by 1.7% in 2012. For the whole European Union, the expected growth rate are 2% and 2.1% respectively.

The IMF has cut its 2011 growth forecast for Japan after the March earthquake and tsunami to a negative 0.7% this year and predicts growth of 2.9% for 2012. The IMF again expects India’s growth to reach 8.2% in 2011 followed by 7.8% in 2012.

Industrial production growth in China has remained strong at between 13% and 14% during the first five months of the year, and India’s growth rate has been around 6% to 9%. In the European Union, industrial production growth is currently at 5%, while in the U.S., it is running at just over 3%. The higher than usual growth rates in 2010, which were achieved due to the low levels to which industrial production fell in 2009, cannot be sustained in 2011 as economic growth is expected to slow down. Global industrial production growth in the full year 2011 is expected to reach 5% compared to 9% in 2010.

World crude steel production totaled 630 million tons during the first five months of 2011, an increase of 7% compared to the same period in 2010. Total steel production is estimated to increase by 7% to 1.5 billion tons in 2011. The World Steel Association reports global steel industry utilization to have recovered from 73% during the winter to around 83% during the first quarter of this year, suggesting that fortunately there is no fundamental problem in the recovery of the global steel industry.

Turning to iron ore, gross imports of this commodity for 2011 are expected to reach up 1.036 billion tons according to Clarksons, an increase of 5% compared to 2010.

However, with the first-quarter data on iron ore imports reported, Germany is down 12% year-on-year, France down 17%, Italy down 15%, Spain down 29%, and the UK down 31%. Nevertheless the projected 2% decline in European iron-ore import in 2011 is a significant negative pressure on the market.

According to Commodore Research, Chinese iron ore production set another record in June. China produced approximately 124 million tons of iron ore that month which was about 21% more than was produced in May and 22% more than was produced in June 2010. Brazil’s iron ore exports to China during the first five months of the year increased by 18% year-on-year to 61 million ton.

Meanwhile India’s iron ore exports to China declined by 25% year-on-year to 42 million ton. Total Chinese imports in 2011 are forecast to reach close to 650 million tons, a 5% increase over 2010’s total Chinese imports of 619 million ton. China represents 63% over the seaborne iron-ore market.

According to Maersk Broker, exports from Australia are expected to increase 3% to 414 million tons in 2011 reflecting the expansion of some operations and the commencement of production probably coupled with a ramp up of production of several mines, which started operations last year.

As for iron-ore stockpile, banchero costa research reports that inventories of China’s major seaports rose to 95.38 million metric tons in the week ending July 17. The country’s steel companies have purchased fewer raw materials recently as the sales of steel products are traditionally flat in July. This resulted in the rise of iron ores’ profile at all major seaports in China.

Coking coal. According to Clarksons, world metallurgical coal rate is only expected to increase 2% to 246 million tons this year, as increased imports from India and the European Union are partly offset by lower imports by Japan. Australian supplies of this commodity have begun to recover recently from the damage caused by severe flooding earlier this year.

Given that U.S. exports are near capacity, if Australia underperforms the market will become extremely tight. In this situation it is possible that Asian imports might come in lower than currently projected. The main risk here is that China could return to domestic supply in the face of high-priced international coal. This will certainly have a negative impact on the shipping market.

Nevertheless, according to Maersk Broker, China’s imports of metallurgical coal are expected to increase in the full-year 2011 despite the decrease seen during the first half of the year. Restocking activity and continued strong growth in steel production will contribute to imports reaching 50 million tons, up 6% year-on-year. Also in 2012, imports are expected to increase as domestic production growth will be outpaced by growth in demand.

Thermal coal now, according to Clarksons, world exports are expected to reach 692 metric tons, million metric tons of course, an increase of 4% compared to 2010. Demand for thermal coal will be underpinned by increase in coal-powered generation demand in South Korea and India, a trend witnessed in 2010 as well.

Increased electricity demand in developed economies, coupled with new generation capacity in developing countries are expected to drive an increase of 2% in global thermal-coal rates with 790 million tons in 2011 and a further 6% growth in 2012 according to Maersk Broker.

In China, the gradually rising domestic thermal coal prices during the second quarter have narrowed the gap with imported coal. Therefore during the second half of the year, imports are expected to increase, also driven by increase in electricity demand. For the full year, imports are expected to exceed 115 million tons. However, if international supplies are limited and prices of imported thermal coal keep going up, China will be pushed back towards domestic sources. We will have to wait and see what the outcome of these two opposing trends will be.

As for grain, the world grain exports are expected to reach 244 million tons during the 2011/2012 season, an increase of just 1% compared to last year. According to Commodore Research, the end of the South American grain season is now with us, the cargos from the former Soviet Union will emerge once the export ban is officially lifted. Furthermore, India’s wheat export ban will be lifted and India will end up exporting about 3 million tons of wheat this year. During the 2011 to ‘12 grain season, the grain trade is not anticipated to have any significant effect on the overall supply/demand balance for bulk carrier except for the usual seasonal effect.

Now, scrapping. Scrapping has been influencing fleet growth in a positive way during the first half of the year and expectations are that this trend will continue for the rest of the year.

In the first half of 2011, more Capesize vessels have been scrapped than the combined number of vessels scrapped from 2006 to 2010. According to Allied Ship Brokers, during the first half of 2011, six very large bulk carriers with deadweight capacity over 1.4 million tons, 39 Capes with an aggregate of approximately 6 million tons deadweight and 30 Panamaxes with an aggregate capacity of 2.1 million tons deadweight were scrapped. A herd of four Post-Panamaxes and baby Capes of 433,000-ton deadweight headed for the scrap yards during this period.

According to Maersk Broker, total bulk carrier scrapping is forecast to reach more than 20 million tons deadweight in 2011 and a further 13 million in 2012. This is the first meaningful number of scrapped vessels we have witnessed since the 2008-2009 financial crisis, which trend at the time did not last long as the freight market recovers from its lows, discouraging owners from scrapping their overweight units.

Naturally, keeping in mind that the age profile of the large bulk carrier fleet, but only 12% of the Capesize fleet is over 20 years old and only 4% over 25 years old, there is a theoretical limit on the number of large bulkers which will be scrapped over the next few quarters, unless of course rates fall even further and are perceived to stay low for the foreseeable future.

Port congestion. On an overall basis, with the exception of Brazilian iron ore loading port, this year we have witnessed an abrupt drop in port congestion both in Australia and China for both iron ore and the coal load in discharge ports. This has naturally released a large number of ships to the market, the fact that intensifies the weakness in bulk carrier freight rates.

Over the next few quarters, we can see the port congestion to remain fairly steady with the exception of specific pockets of increased port activity that I believe it should cease being a source of extra tonnage released to the market at further depressing rates.

Let’s turn to fleet growth now. Clarksons estimate that about 48.3% of the existing Capesize fleet is on order, amounting to 554 ships with deadweight capacity over 108.3 million tons. For Panamaxes, the numbers are 49.3% of the fleet with 888 vessels of 71.2 million tons deadweight capacity.

Deliveries during the first half of the year amounted to 125 Capes, inclusive of conversion and an equal number of Panamaxes. The slippage rate was 37% in the case of Capes and 33% for the Panamax ships. At time of changing sentiments by the Brazilian mining giant, Vale, we report that the company is considering tucking in half the size of a series of 20 giant 400,000 deadweight bulk carriers newbuilding orders to carry iron ore to China. There is speculation now that about 12 of these VLOCs will be switched into a yet-to-be-determined number of large Capesize bulkers between 200,000 and 250,000 tons deadweight capacity.

The anticipated net fleet growth during 2011 is approximately 13.7% for all bulk carriers, according to Clarksons. This figure is inclusive of conversions and net of losses and anticipated scrapping. Assuming a slippage rate of 35%, the fleet is expected to grow by 11.3% in 2011 and 14.1% in 2012.

As for Capes, the fleet is expected to grow by 16% this year. The Clarksons analysis highlights a number of poorly performing demand-price indicators, which have caused a reduction in expectations for growth in the iron ore and grain trade.

As mentioned above, the portions of European iron ore demand have been looking less bright in recent months and Chinese iron ore imports are relatively static by China’s standards. This is a serious concern for the market balance going forward.

This is not a trading environment which inspires huge confidence and optimism about the future direction of the bulk-freight market. As we have mentioned in past conference calls and presentations, Diana would have prepared the company take advantage or weakness in asset values and grow through the acquisition of cheaper and cheaper vessels. These will be financed partially by the company’s own cash resources and partially through commercial loans. We believe this policy will ultimately produce extremely attractive returns to our shareholders, which will fully justify the company’s decision to suspend dividend payment and collect cash to finance these attractive acquisitions.

I will now pass the call to our CFO, Andreas Michalopoulos, who will provide you with a summary of the company’s first half and second quarter financial results.

Andreas Michalopoulos

Good morning. I’m pleased to be discussing today, Diana’s operating results for the second quarter 2011 and six months ended June 30, 2011. Second quarter 2011, net income for Diana Shipping Inc. for the quarter amounted to $US27.7 million and the EPS was $0.34.

Time-charter revenues decreased to $64.6 million compared to $68.7 million in 2010. The decrease is attributable to decreased average time charter rate as we achieved for our vessels during the period compared with the second quarter of 2010. The decrease in revenues were slightly affect by an increase due to the addition of fleet of the vessel Alcmene in November 2010.

Ownership days were 2,093 for the second quarter of 2011 compared to 2,003 in the same period of 2010. Fleet utilization was 99.6% in the second quarter of ‘11 and 99.7% in 2010. The daily time-charter equivalent rate for the second quarter of 2011 was $30,597 compared to $53,105 for 2010.

Other revenues for the second quarter of 2011 amounted to $0.3 million and some piece of revenue derived from the management and administrative agreements by Diana Shipping Services and Diana Containership Inc. Voyage expenses were $2.7 million for the quarter.

Operating expenses amounted to $14.1 million and increased by 18%. The increase is attributable to the increased crew costs and repairs and maintenance cost of the vessels. Daily operating expenses were $6,724 for the second quarter of 2011 compared to $6,006 in 2010 representing an increase of 12%.

Depreciation and amortization of deferred charges amounted to $13.6 million. General and administrative expenses decreased by $0.6 million, or 9% for the second quarter 2011 to $6.2 million compared to $6.8 million in 2010. The decrease was mainly attributable to the deconsolidation of Diana Containerships Inc. and office rent that existed in the second quarter 2010 and did not exist in 2011. The decrease was partly offset by increased salaries and compensation cost on restricted stocks.

Interest and finance costs were $1.2 million for the quarter, the same as in the second quarter of 2010. The income from investment in Diana Containerships Inc., after the consolidation of Diana Containerships Inc. we account for our investments under the equity mix.

In June 2011, we had 50 basis in the public offering of Diana Containerships with the current private offering of $20 million, increasing our ownership to 14.45%. For the second quarter 2011 there was a gain in our investment of $25 million six months ended June 30, 2011.

Net income for Diana Shipping Inc. for the six months ended June 30, 2011 amounted to $60.8 and the earnings per share was $0.75. Time charter revenues for the six months ended June 30, 2011 increased to $154.1 million compared to $130.9 million for 2010. The increase is attributable to increased revenues and due to the addition of fleet of the vessel Melite, New York, and Alcmene in January, March, and November 2010 and were partly offset by the decreased average hire rates during the six months ended June 30, 2011 compared to 2010.

Ownership days were 4,199 for the six months ended June 30, 2011 from 3,897 in 2010. Fleet utilization was 99.2% for the six months end June 30, 2011 and 99.7% in 2010 and the daily time-charter equivalent rates was $31,104 compared to $32,560 for the same periods in 2010.

Other revenues for the six months ended June 30, 2011, amounted to $0.4 million. Voyage expenses were $5.6 million for the six months ended June 30, 2011. Operating expenses amounted to $26.4 million, an increase of about 8%. The increase is attributable to 8% increase in ownership days resulting from the delivery of our vessels – Melite, New York, and Alcmene – the increase was also due to increased crew costs and was partly offset by decreases in all other operating expenses.

Daily operating expenses were $6,297 for the six months that ended June 30, 2011, the same as in 2010. Depreciation and amortization of deferred charges amounted to $27.1 million for 2011. General and administrative expenses increased by $0.9 million or 8% for the six months ended June 30, 2011 to $12.8 million compared to $11.9 million in 2010. The increase was mainly attributable to increases in salaries and compensation cost on restricted stocks and was partly set off by the reduction in costs due to the deconsolidation of Diana Containerships Inc. and fixed rates.

Interest and finance costs increased by $0.2 million to $2.5 million compared to $2.3 million in the same period of 2010. This increase was attributable to increased average debt during 2011 compared to 2010 and it was partially offset by increased average interest rate. The income from investment in Diana Containerships now for the six months ended June 30, 2011 there was gain in our investment of $0.6 million.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Gregory Lewis with Credit Suisse, please state your question.

Gregory Lewis – Credit Suisse

Yes, thank you, and good afternoon.

Simeon P. Palios

Good afternoon.

Gregory Lewis – Credit Suisse

Andreas, real quick, can you just provide a little bit of guidance in terms of what vessel operating expenses are going to look like in the back half of the year, and what vessels are going to be scheduled for dry dockings?

Andreas Michalopoulos

Yes, of course. First of all as you pointed out and that is probably why you are asking the question, is we have quite a few vessels dry docking during that quarter, mainly Motor Vessel Alcyon, Motor Vessel Alcmene, Motor Vessel Semirio, Motor Vessel Naias – as Naias and Semirio by the way, were brought forward because we found a port that was more convenient for them to dry dock than according to the rules. So, this is the reason why you see also operating expenses being slightly higher than what we usually have. And this is also – and it’s because during dry dock we make sure we also perform other duties as going to operating expenses.

So, this quarter you have $6,724 per day per vessel as an operating expense, but we foresee this number for the next quarter to be more close to $6,300 to $6,500 per day per vessel. Now, in terms of the vessels that are due for dry dock until the end of the year, we have Motor Vessel Erato that is due for dry dock and Motor Vessel Philadelphia.

Gregory Lewis – Credit Suisse

Okay. So, two...

Andreas Michalopoulos

And at the beginning of 2012, we have also Thetis and Protefs, so this might be advanced at the end of 2011. But you understand that this dry docking schedule is a moving one according to the best ports we can find in order to perform the dry dock of our vessels.

Gregory Lewis – Credit Suisse

Of course, of course. Okay, great, thanks. And then Stacy, you mentioned briefly in your comments about the potential for Cape scrapping to continue if rates continue at these lower levels. When we think of about where Cape rates are whether its spot rates and/or available charter rates, have we come to the point where we are seeing Capes being idled, and if they are not – at what type of level do you think rates need to go to, to see Capes being idled?

Anastasios C. Margaronis

Well, there are no Capes idle at the moment or there are no ones that we know of. And very rightly so, because the time charter rate today for a Cape is a multiple to the running expenses of the ship. So, if the running expense of the ship is $7,000 you can charter you vessel at $11,000, $12,000 or if it goes for let’s say for a three-year period, you could go as high as $14,000. So, you are making money.

So, why should you lay up the vessel. The time that the vessel will be on the bottom will be when the running expenses is same as the charter rate you offer, namely at $7,000 and we are far from the $7,000 for the Capes and that’s why there are no ships laid up. Now, if I go a little bit further, the vessel becomes a liability when she is earning less than the running expenses. Until then, she is an asset.

Gregory Lewis – Credit Suisse

Okay, great. And then just one real quick follow-up – final question. It seems like over the last, call it, 18 to 24 months, the Japanese shipyards have been rather disciplined on where they are willing to sort of indicate newbuilding prices out into the market, but more recently, it seems like maybe they are becoming a little bit more aggressive on newbuilding prices. Is this something that you are seeing or do you think this is more just idle chatter?

Andreas Michalopoulos

Well, the plates have gone up, but the steel plates have certainly gone up. But this is completely irrelevant in the shipping fraternity, because as we said, the replacement cost of the ship has no bearing whatsoever on the price of the second-hand or the resales. The vessel is good if she can earn and if she can transport the load that she has on board. If she has no cargo on board then as we said before, is a liability. So, the replacement cost has no bearing on the price of the second-hand ships or even the resales.

Gregory Lewis – Credit Suisse

Okay, great. So, then the Japanese, it sounds like Japanese are remaining disappointed on where their newbuilding prices are indicated?

Andreas Michalopoulos

Well, I think the Japanese have a lot of things to think about, because are they going to compete with the Koreans or with the Chinese? There is a difference in price – a huge difference in price. But as regards to the owner who is buying the ship, he couldn’t care less whether the replacement cost is high or low and whether – of course, he has to bear in mind whether the vessel is built in Japan or in China, or in Korea. But we’re thinking about fine-tuning...

Gregory Lewis – Credit Suisse

Okay, great. Thank you very much, Mr. Palios and Andreas.

Andreas Michalopoulos

Thank you.

Operator

Our next question comes from Justin Yagerman with Deutsche Bank. Please state your question.

Justin Yagerman – Deutsche Bank Securities, Inc.

Hi, guys, good afternoon. How are you doing?

Simeon P. Palios

Hi, Justin.

Justin Yagerman – Deutsche Bank Securities, Inc.

Hey, few questions here, just generally on the market and how you are thinking about things. Given the low levels and your desire to continue fixing vessels out, which is consistent with your strategy – do you think about profit-sharing charters here, just to give you some optionality or are there any profit-sharing charters in the market with floors that are now attractive? What should we be expecting as we look out and you guys charter open days on your ships?

Simeon P. Palios

Well, Justin, I think that you know our strategy and we would like to keep our strategy as clear and transparent. If you are introducing floors and ceilings and this and the other, you make your company less transparent, and we would like to keep it like that. At the moment there are a not a lot of this type of bids, but bear in mind that we have also to look when the ships are coming open. Now we have, at 2012, we have several ships, which are coming off charter and the repurchases, that we are going to make – the eventual purchases – we would like to rectify that. And that’s what we are going to do, and that’s why we are not interested doing M&A’s or things like that, whereby you’re spending a lot of money at one shot.

Anastasios C. Margaronis

Justin, let me add something here.

Justin Yagerman – Deutsche Bank Securities, Inc.

Yeah, you got me.

Anastasios C. Margaronis

You understand that this type of spot exposure that you’re looking by producing profit-sharing charter party, et cetera, in case the market turns the other way, we have this by having vessels opening throughout the cycle, as we have said many times.

So, we don’t need this profit-sharing arrangement, you understand that instead of having a profit-sharing arrangement for a vessel, we have another vessel, but it’s going to take advantage of the market picking up at 100% instead of 50% that’s usually a profit-sharing arrangement offer.

Anastasios C. Margaronis

And we’re keeping our clarity and transparency intact.

Justin Yagerman – Deutsche Bank Securities, Inc.

I understand that. I guess you get a faster fluctuation rather than waiting for the vessels to open in the spot market. But I do understand the counterbalances, it obviously creates a level of or a lack of transparency in terms of what you guys are earning. If I understood you right, basically the capital that you will deploy in this market in your view offsets the low spot-market charters because you’re going to be buying those assets at lower prices, was that the right interpretation?

Anastasios C. Margaronis

We are going to be buying assets slowly and most probably the first ones that we’re going to be buying – they are going to have revenue – charter revenue that is going to be accretive to the cash flow of the company, it is going to adding to the cash flow of the company. And slowly we will end up in a position where we will be adding vessels into the company that most probably they will not be able to earn profitable revenues and you will have the other vessels compensating for that. But certainly, those are going to be in the very attractive prices.

Justin Yagerman – Deutsche Bank Securities, Inc.

Okay. Sure, so is fleet M&A off the table then because you want to be able to stagger your purchases or if something attractive came across, would you consider buying more than one ship at a time?

Simeon P. Palios

For many reasons, our M&A is not the first option of the company. The reason the first one is the one that you mentioned that we do not intend to spend a lot of money at one point in the cycle. The other reason has to do with due diligent matter and the difficulties that exists, logistics-wise, to buy a company’s vessel for value charter. But the third reason has to do with difficulty of combining two different leads – most probably add a company that do not have the type of vessel that we want. But having said that, we have never said that we will not look at anything that may arise and especially if the ways that we’re going be buying the company is fast but it does not change enormously, the financial position of the company.

Let’s take the hypothetical scenario where you find a company that are willing to accept Diana says and after we having done the due diligence, the necessary due diligence, and their fleet is one of interest to us, you may see something from our side. However, we have to make clear to everyone that apparently, we are not negotiating with any company around. We’re not interested at this moment in any kinds of M&A activity.

Justin Yagerman – Deutsche Bank Securities, Inc.

Thanks. I think, I know the answer to this but given the out-performance of the asset class so far in the downturn, would you consider Supramaxes, as you look at M&A or you guys still Cape and Panamax focused?

Anastasios C. Margaronis

Well, again we have said from day one that we will be speaking to the Panamaxes, both Panamaxes and Capes, and bigger Capes. I think we should remain in those categories and they’re enough.

Simeon P. Palios

And also Justin, if you care to look at the history, it is true that smaller ships have done better during recessionary times than larger vessels in any industry and the bulk carrier industry is not an exception. But to look also at the Supramax newbuilding figures and unfortunately they don’t make very pleasant reading. People have gone overboard here in ordering these ships rather quietly while the headlines has been taken by orders of Panamaxes and Capes and very large bulk carriers for values, but they are a lot of ships unfortunately which are on order in the Supramax and Handymax size, which is not very encouraging.

Justin Yagerman – Deutsche Bank Securities, Inc.

Yeah, I appreciate the color. Thanks. I appreciate the consistency. Take care.

Andreas Michalopoulos

Thank you.

Anastasios C. Margaronis

Thank you, Justin.

Operator

Our next question comes from Fotis Giannakoulis with Morgan Stanley. Please take your question.

Fotis Giannakoulis – Morgan Stanley & Co. LLC

Yes, guys.

Anastasios C. Margaronis

Hi, buddy.

Fotis Giannakoulis – Morgan Stanley & Co. LLC

I want to ask you about the asset values. With admirable discipline you have avoided any acquisitions during the last two to three years. Obviously, the market has proven you right. I want to understand, if you think of the timing to buy ships is closer, how long do you think that the asset value will keep declining, and at what point do you put the turnaround of the market – is it 12 months, 18 months or even further away?

Andreas Michalopoulos

Thank you, Fotis, for the question. As we said before, the bottom has not been reached yet and the reason is that you can charter your ship at a multiple to the running expenses of the vessel.

Now, it looks that one way or another, we are going to reach the point where the running expenses will be the same as the chartering rates, the charters are offering. In that case, the bottom has been reached. Now how long it’s going to stay at the bottom, surely, we don’t know and we don’t like to predict. And this is the reason we have entered the stock exchange in March 2005 to enable us to eliminate an unknown that nobody knows. So, we don’t know whether it’s going to take one year or two years, or three years. But charter, new ramping has arrived that we will be around.

Fotis Giannakoulis – Morgan Stanley & Co. LLC

That’s for sure, I want to ask you – given with your discussion with the banks, I know that you have a existing credit line which are massive. If you were considering of levering up the company of its maximums. And I know that this is not something that’s – it’s a little bit further way and most probably is something that you’re not considering. What is the acquisition power that the company has right now?

Anastasios C. Margaronis

Well it depends how we are going to weather out the situation, whether we’re down. Now don’t forget that today theoretically, if you have $1 billion at some point in $1 billion, market cape, theoretically, you should gear the company up – when it starts growing, when the freight market goes up at 50%. So, to do that, you have to spend $0.5 million. But you have to watch prices – how they are developing. So, theoretically, you should get into the half of the cycle when the cycle is going toward north with 50% at the values of that time, which of course will be different, they are not going to be today’s prices.

Simeon P. Palios

And if I may add on, Fotis, in terms of fire power. I want to mention here that we still have – despite the facility that we have with Royal Bank of Scotland and two loans that we have in place, one, with Bremer Landesbank and one with Deutsche Bank – we are still a total of eight vessels unmortgaged completely (inaudible); of course, you can mortgage debt finance. Three of them are Panamaxes and five remaining are Capesize vessels, just to give you an idea of the fire power and then you can make the math together with the cash that we have on hand, et cetera.

Fotis Giannakoulis – Morgan Stanley & Co. LLC

One different question is, we have seen the last few days we have heard the discussions about charter is not paying their charters as agreed, we heard about the situation with the tax in China. How important these tax is – I know that does not concern you when with your BHP and Cargill charters, you are pretty secured, but how important is this for the market and do you see potentially some of the operators having difficulty in being able to pay the charters?

Simeon P. Palios

Well, we have charters with Chinese and we have nothing like that until today.

Anastasios C. Margaronis

The Chinese freight tax, Fotis, I think is used more as a pre-tax for non-payments of hires than anything else. And if you look at the numbers compared to the discrepancy between some existing time-charter contracts and the current market, the tax issue is sometimes very minimal. The main problem with some operators is going to be how they are going to manage their overall portfolio of ships as regard old time charter contracts, which have not expired yet, and some have a fairly long time to ago and to run.

And that is something we’re looking carefully at in order to establish who from the group of operators of large bulkers are more vulnerable to market forces as they are developing now and who are stronger and can easily survive.

Simeon P. Palios

Fotis, you should expect based on what we have described earlier about the market conditions and what do we see about the future, you should expect much more problems with charters regardless whether they are Chinese or not.

Fotis Giannakoulis – Morgan Stanley & Co. LLC

Thank you very much, guys. Thank for your insights.

Anastasios C. Margaronis

Thank you.

Operator

Our next question comes from Scott Malat with Goldman Sachs. Please state your question.

Scott Malat – Goldman Sachs & Co.

Thanks. I’m wondering about waivers on covenants that seem to be coming up for renewal pretty much across the industry. Can you help us think how this plays out? Have you started to see or do you expect to see some banks call in some assets, take a loss and what other impacts can we expect from this?

Anastasios C. Margaronis

I would say that for us, we understand looking at our balance sheet does not apply according to – our net debt is positive, we have plenty of vessels unmortgaged, and therefore, there is no such issue for the company.

Now, for the other companies, I cannot really comment what is going to happen but we have been saying – and this is the essence of our strategy – over and over again that in a cyclical industry, when you lever up your company at the high-end of the cycle when asset values are sky-high and layered on that, you also issue the dividends, then you have your company levered. You’re bound to be at one point in time when the cycle turns south and the asset values drop, you’re bound to be in trouble. That is the only comment that I can give in this I think will answer your questions. Your question.

Scott Malat – Goldman Sachs & Co.

I guess I’m thinking just in terms of if you look out the pace of those agreements coming on maybe the loans-to-value covenants coming off, do you think they are going to accelerate in the industry, and some of the smaller players in the back half of the year and into 2012, where you’re going to see a lot more of this activity and whether or not banks are going to decide to extend the agreements?

Anastasios C. Margaronis

How patient the banks are going to be we cannot comment on as well. We have seen periods where, for example in the containership sector, where banks were especially patient but for a reason. And we think that’s point number one. Point number two, as asset values go down, this is in correlation I think to asset values, as asset values goes down, obviously all those covenants will hit.

Simeon P. Palios

Scott, you’re going to have issues also with the revenues covenants – EBITDA covenants – and you’re going to see that in various companies.

Anastasios C. Margaronis

And how banks will react, will depend on their overall debt portfolio and the loan portfolio. And also on the age impact of the assets, because younger ships of course are going to be looked at with a different eye and with more, lets’ say, patience and flexibility than older ships which do not appear to have much of a future if this market weakness remains with us for a number of quarters.

So, each bank will have to take some hard decisions towards the end of the year. And we cannot predict what they will be. For sure, they will not be pleasant, and some ships might come up for sale whether they’re going to be attractive for companies like ours to purchase or not the remains to be seen.

Scott Malat – Goldman Sachs & Co.

Okay, thanks that’s helpful. And then the other thing, I was just wondering about the availability of financing, especially for the newbuilds out there. It seems like Chinese banks continue to increase their lending. How do you think about or what’s been you think the pace of the availability and lending for some of the smaller players and other players out there recently?

Anastasios C. Margaronis

Two parts of your question, first of all let’s start with us. We’re in very good terms with banks. We just purchased Motor Vessel Arethusa which we are going to find a loan facility for it. So, – and that we’ll close my discussion on ourselves, you know the strategy and you know what we’re doing.

Now, concerning Chinese banks, as you know, we also have a facility in place with China Export Import Bank – Export-Import Bank of China, sorry, which we think we will be first – one of the first, the first, I think – public company, dry bulk, to have such a loan with such an organization. We think that yes, they are active in the markets in order to finance some players and mainly to finance of course the newbuildings that come out of their yards, but at the same time they realize that these cannot be extended indefinitely or too uncautiously, that’s our belief, and that they will need to be selective on who and how they finance their newbuilding program.

Scott Malat – Goldman Sachs & Co.

Okay. Thanks.

Operator

Our next question comes from Salvatore Vitale with Sterne, Agee. Please state your question.

Salvatore Vitale – Sterne, Agee & Leach, Inc.

Hi, good morning, gentlemen.

Anastasios C. Margaronis

Good morning.

Salvatore Vitale – Sterne, Agee & Leach, Inc.

Thanks for taking my question. I just have a quick question and I apologize if you addressed this earlier. Can you just apprise as to what your plans are for what you want your contract coverage to be for next year, I think, it should be at the 70% or 80%, is that the right level and if so is that the level that you’re comfortable with at this stage?

Anastasios C. Margaronis

We are at the moment at the 58% level for the earlier possible days for delivery by the charters.

As we said earlier, we feel that by buying slowly assets this percentage is going to be increasing because of the moment the policies of the assets that we are going to be buying, they are going to go through 2012. But as a general comment, we have said in the past that we are not looking for specific percentages for fixed revenues, what we’re looking for is to have a very good average capability in the cycle, being able to charter a vessel very often in a year – not the same of course – but other vessels to charter. So, at the end of the day, we get the average of the market. But currently we stand up with a58% level for the earliest possible delivering days by the charters for 2012.

Salvatore Vitale – Sterne, Agee & Leach, Inc.

Okay, thank you. That is very helpful.

Anastasios C. Margaronis

You are welcome.

Operator

There are no further questions at this time, I will turn the conference back to management for closing remarks. Thank you.

Simeon P. Palios

Thank you again for your interest in and support to Diana Shipping. We’ll continue to manage the company for steady performance in a challenging marketplace and we look forward to speaking with you next quarter. Thank you.

Operator

Thank you. This concludes today’s conference. All parties may disconnect.

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