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L&L Energy, Inc. (NASDAQ:LLEN)

F1Q2013 Results Earnings Call

September 11, 2012 11:30 AM ET

Executives

Sean Morishige - Assistant

Ian Robinson - Chief Financial Officer

Clayton Fong - Vice President, U.S. Operations

Analysts

Don Sinsabaugh - Fulcrum Securities

Steve Anderson - Private Investor

Jack Casey - Private Investor

Gary Scott - Private Investor

Operator

Good day, ladies and gentlemen. And welcome to the L&L Energy Incorporated First Quarter Fiscal Year 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Sean Morishige. Sir, you may begin.

Sean Morishige

Good everybody. With me today is L&L’s Chief Financial Officer, Ian Robinson; and Vice President of U.S. Operations, Clayton Fong.

Before I turn the call over to Mr. Fong, may I remind our listeners that in this call management’s prepared remarks contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions.

Information regarding forward-looking statements, except for historical information contained herein are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve known and unknown risks, as well as uncertainties, which may cause actual results in future periods to differ materially from forecasted results.

As results may differ from those discussed today, and therefore we refer you to the more detailed discussion of the risks and uncertainties in the company’s filing with the Securities and Exchange Commission.

It’s now my pleasure to turn the call over to L&L’s Vice President of U.S. Operations, Clayton Fong. Mr. Fong, please go ahead.

Clayton Fong

Thank you, Sean, and good morning to everyone. We had a good quarter. So I’d like to share with you some of the results and discuss some recent developments. Production, revenues and earnings per share are up both year-over-year and quarter-over-quarter. We expect further improvement on the top and bottom line as seasonal coal prices go up from the summer lows and Weishe mine ramps up production.

We continue to capitalize on the consolidation opportunity in Guizhou province. The potential to acquire mine such as the Yunnan Energy Mine that meet our safety standards, scalability and operational efficiencies could be a major driver of sales growth moving forward. We are pleased with the progress thus far toward becoming a consolidator in Guizhou.

In parallel, we’re making great strides in expanding our wholesaling capabilities. Our wholesale segment experienced significant growth on the both year-over-year and quarter-over-quarter basis.

The relationships we secured with Datang with China Construction Bank, AVIC Sichuan Coal Logistics during the first quarter, as well as more recent acquisition of sales focus GuangYeh Coal further strengthens our capabilities in the wholesale market. Overall, I believe this segment is attractive and poised for rapid expansion in the quarters ahead.

I’d like to thank our shareholders for their continued support. And with that, I’d like to turn the call over to our Chief Financial Officer, Ian Robinson, will give a details of our fiscal year financial results.

Ian Robinson

Thank you, Clayton. Good morning for all those on the call today. We are pleased to report another quarter of solid improvement. This confirms our expectations that we are turning the corner from the challenges of the previous year. Our product of 149,000 tons represents year-over-year growth of 116% and quarter-on-quarter, an increase of 38% from the fourth quarter.

Our total sales for the quarter were $45.3 million and this was broken up into mining $15.5 million, washing $17.9 million, wholesale $12.3 million, coking $1.7 million.

Revenues continuing -- from continuing operations increased 26% year-over-year to $45.3 million in the first quarter of the fiscal year 2013. On quarter-on-quarter basis revenues from continuing operations increased 11% was $41 million last quarter.

Wholesale revenues increased to $174 million -- 174% year-over-year to $12.2 million for the first quarter for the fiscal year 2013. On a quarter-over-quarter basis wholesale revenues increased 94%, compared with $6.3 million last year.

Net income attributable to L&L increased to 159% year-over-year to $6.2 million for the first quarter of the fiscal year 2013 and increased 48% from $4.2 million in the fourth quarter.

Important issue is tangible book value per share from -- applicable to L&L is $4.7 and as at 31st of July 2012, earnings per diluted share were $0.17 for this quarter.

Clayton, would you like to make a few further comments.

Clayton Fong

Thanks Ian for the review of the financial data. Before moving onto the Q&A, I’d really just like to briefly summarize. We’re quite pleased with our accomplishments during the quarter and we really believe we’ve got the stage set for accelerated growth in our mining and wholesaling segments.

I’m confident our strong start in the first quarter is just beginning of 2013 and will be a great year for L&L. Just to summarize really quickly, production is up. Earnings are up and the prices are firming and we are ramping our production in Weishe. Those are all good signs that really look forward -- look well forward from here on now.

With that, I’ll turn things back over to the operator to begin the Q&A session.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of

Don Sinsabaugh with Fulcrum Securities. Your line is open.

Don Sinsabaugh - Fulcrum Securities

Thank you. Congratulations on a great quarter. Could you discuss your progress in finding other mines in Guizhou province through acquisition?

Clayton Fong

Sure. Let me just start by saying we’re making good progress along those lines. I think the next focal points are a couple of MoUs that we announced recently on Union Energy mines. Those mines are little larger scale, designed a little larger than some of the traditional smaller 150,000 tons mines. So at this point, our main focus at least for the short term will be those kind of larger better design mines.

So we’re very pleased with the process -- with the progress on those and hardly put a timeframe on it. But I will say that the intention is to execute a deal with those mines once they are operational.

Don Sinsabaugh - Fulcrum Securities

And they are being made operational by the energy company?

Clayton Fong

Yeah. Union Energy has -- what I’m told, one of them is just about to become operational so that timing -- the serious negotiation should begin shortly.

Don Sinsabaugh - Fulcrum Securities

Good. So that could fall into this quarter in terms of a live acquisition?

Clayton Fong

I don’t want to put a timeframe on it other than that. You never know how long negotiations are going to take.

Don Sinsabaugh - Fulcrum Securities

Correct. Anything to report on your activity in Mongolia?

Clayton Fong

Mongolia continues to be an important diversification strategy for us. But our primary drivers right now are the Guizhou consolidation and the increase in wholesale. Mongolia will be an important piece. It not only represents surface mines but it’s a regional diversification which is good for any coal company but -- since they’ve already completed their consolidation, we expect that the accretive acquisitions in Guizhou will be more beneficial for shareholders on a short term.

Don Sinsabaugh - Fulcrum Securities

Great. Thanks again.

Operator

Thank you. Our next question comes from the line of Steve Anderson, a private investor. Your line is open.

Steve Anderson - Private Investor

Hi. Congratulations on the quarter, my question also is in regards to the acquisition of the LuoZhou Mine. It says that you may trade the DaPing mine for the LuoZhou Mine. My question, first question is what happens to the $15 million that you are still contractually obligated to pay for the DaPing mine?

Clayton Fong

We did do a release where that was a possibility. I think we are putting out, laying out some prospects with regard to how this kind of acquisition could be financed. With regards to that, the remaining cash owed on the DaPing Mine was deferred in terms of payments based on -- the last year has been kind of rocked operationally. So they didn’t hit all of their milestones. So we’re able to renegotiate a slower payment schedule.

We would -- I won’t -- we have nothing to deal but if we would do such a deal, we would expect that all obligations would go along with it.

Steve Anderson - Private Investor

Okay. And just one quick follow-up, when you compare the production, the current production of DaPing, would there be a drop off in production compared to the start-up of the LuoZhou Mine and if so approximately how much would that be in tons?

Clayton Fong

Yeah. Really, it depends on the timing of which the transaction takes place. The key is probably to do the LuoZhou Mine when it’s actually operational. It is designed to be a larger mine than DaPing. However, as you know, with the new mine, there are always is a start-up period.

So I think the key is when we make that -- when we make that deal, I think we would -- we were striving that deal to minimize any -- both long and short-term reduction in earnings.

Steve Anderson - Private Investor

Okay. Thank you very much.

Clayton Fong

Yeah.

Operator

(Operator Instructions) Our next question comes from the line of [Jack Casey], a Private Investor. Your line is open.

Jack Casey - Private Investor

Good morning, gentlemen. I have two questions. Last quarter, you did $0.21 a share and in this quarter you did $0.17 a share. Does that relate to the expense side of it or is the inventories increasing? Can you hear me?

Clayton Fong

Yeah. Sure. Thanks. Ian, you want to take that?

Ian Robinson

Yeah. Inventories have increased in this quarter. And the expense side is in fact we are trying to reduce it, but it really didn’t -- the reductions didn’t take place until the current quarter in -- as of now. So...

Jack Casey - Private Investor

How was the inventory situation?

Ian Robinson

Yeah. Sorry, I just wanted to finish what I was going to say. The main situation was that the prices of coal have gone down in this last quarter, we think that bottom out and we anticipate those to firm up in the winter period. You’ve got anything?

Clayton Fong

Yeah. Let me add a little to that. The main driver for the reduction is definitely price of coal. The price of coal was down partly seasonally. We expect on a year-over-year basis from our previous experience anywhere from a 5% to 10% differential between winter and summer. So that’s expected. This particular -- we have seen almost 15% reduction from the quarter before.

And so it’s slightly higher and I think that has a little bit to do with the softening demand of coal worldwide and a bigger supply of coal that’s available for import. So what you saw this last quarter was imports. Imported coal prices dropped quite a bit and it did have an impact.

So the bottom line is really they going forward though we have begun to see prices firm up already as we anticipate the firming of prices going into the winter. So what you really have is a situation where pricing was the main driver for the lower earnings, but that’s a typical seasonal scenario, a little bit more than normal, but typical seasonal scenario going forward we expect them to move that forward.

So, we’re really ahead of target. What I would do is focus very much on the production side, where we saw substantial increases in production. And I think that’s really the key thing. Inventories did go up modestly, but that again is a seasonal thing that we often see. We will typically let our inventories go up during this the lower price summer month and really let them deplete more during the winter months.

So, we saw inventories go up about I don’t have the number in front of me, but I believe it’s around U.S. $5 million to about U.S. $6.5 million. So, it’s not a big increase but a modest increase.

Jack Casey - Private Investor

I have one other question. The previous class action lawsuit, I don’t know if you can answer this. Have they been resolved, they been dismissed?

Clayton Fong

In regard, the class action lawsuit, those these frivolous annoying suits unfortunately do take time to go through. We still firmly believe that this is a frivolous without merit suit and our attorneys have actually submitted a motion to dismiss. And we are just waiting for the process to go through, work through the courts.

Jack Casey - Private Investor

So you don’t have any idea, when that will be resolved?

Clayton Fong

There are really is not a timeline you can put on our legal system. The beauty of our U.S. legal system is -- it is fair. One of the beauty is -- it doesn’t always move quickly.

Jack Casey - Private Investor

All right. Thank you.

Clayton Fong

Yeah.

Operator

(Operator Instructions) And our next question comes from the line Gary Scott, a Private Investor. Your line is open.

Gary Scott - Private Investor

Thank you. Hi, guys. Congratulation on another good quarter. I’m wondering how much of the Weishe Mine production was included in this results that you filed yesterday?

Clayton Fong

You actually raised a very good question that we did want to emphasize and that is that Weishe has been in its trial production up until recently getting it safety approval. And so there is roughly approximately only about 15,000 tons of production in this quarter. And we would expect that number to grow substantially now that it’s had its full approval to operate it at 150,000 tons a year.

So I think you will see an improvement -- we expect an improvement this quarter that we are in and even bigger improvement the following quarter.

Gary Scott - Private Investor

Okay. And one follow-up question I know at the annual shareholders meeting, it was agreed upon to pursue or at least do so more fact finding on a door listing. Are you guys looking at the Hong Kong Exchange or Shanghai, what are you, kind of, doing? Can you give me more information on that?

Ian Robinson

Yeah. We are definitely looking at Hong Kong that’s in consideration and we will continue. We’re very seriously looking at it.

Gary Scott - Private Investor

Yeah. But timeline for that 12 months, 6 months?

Ian Robinson

No. Listing on Hong Kong is not easy. It has quite a lot of requirements particularly we need to get some mining assessments done, the amount of reserves, all these things need to be done. So it takes time. It would normally from start to finish, it could take well over a year to actually take place.

Gary Scott - Private Investor

Okay. Thank you.

Operator

Thank you. And I’m not showing any further questions at this time, I would like to turn the call back over to Mr. Sean Morishige for closing remarks.

Sean Morishige

Thank you everyone for the question-and-answer period. I would like to remind everyone that a replay of today’s call is available for one week from today beginning at 12:00 p.m. Eastern Time until 12:00 -- 11:59 p.m. Eastern Time on September 18th. The number for the replay is 1-855-859-2056 or for international calls 404-537-3406. Please note conference ID number 28541983. Thank you everybody. You may now disconnect.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. And you may all disconnect. Everyone have a great day.

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