Gulf Resources, Inc. (GURE) Q2 2018 Earnings Report, Transcript and Summary

Good morning. My name is Kyle and I will be your conference operator today. At this time, I would like to welcome everyone to the Gulf Resources 2018 Second Quarter Earnings Conference Call. All lines will be placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Ms. Xu, you may begin your conference.

Thank you, operator. Good morning, ladies and gentlemen, and good evening to those of you who are joining us from China and we would like to welcome all of you to Gulf Resources’ second quarter 2018 earnings conference call. My name is Helen, the IR Director. Our CEO of the company, Mr. Xiaobin Liu will also join this call today. I will be offering translation for his comments for the Company’s operating results during the Q&A session. I would like to remind you to all our listeners that in this call, management’s remarks will contain forward-looking statements which are subject to risks and uncertainties. The management may make additional forward-looking statements. Therefore, the company claims the protection of Safe Harbor for the forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today depending upon a number of risk factors, including, but not limited to, the general economic business condition in China, future product development and the production capabilities, shipments to end customers, market acceptance of new and existing products, additional competition from the existing under the new competitors from the bromine and other oilfields, agriculture and applying production chemicals and change in technology, the ability to make future bromine asset purchase and various other factors beyond the Company’s control. All forward-looking statements are expressly qualified in this entirety by this precautionary statement and the risk factors detailed with the Company’s reports filed with the SEC. Accordingly, our company believes the expectation reflected in these forward-looking statements are reasonable and there can be no assurance of such will prove to be correct. In addition, any reference to the Company’s future performance represents the management’s estimates as of today, August 13, 2018. Gulf Resources assumes no obligation to update these projections in the future as market conditions may change. For those of you who unable to listen to the entire call at this time, a replay will be available for 14 days at the Company’s website. The call is also accessible through the webcast and the link is accessible through our website. So please look at our press release issued earlier for the details. Liu?

[Foreign Language]

[Foreign Language] So I’ll be offering translation for Mr. Liu. Thank you very much all for attending Gulf Resources 2018 second quarter earnings conference call. And the company had surrounding events of the close of our facilities. So today our management will be answer all the questions we received from investors by Helen first, then I’ll be doing the response to questions by investors during the Q&A session. So now I’ll provide the summarized question, answers company received recently from our shareholders and our investors. First of all, let’s look at bromine section, regarding rectification the first question that what’s the status of approval process for each of the various bromine production plant? For this question, we refer to the 10-Q and the press release company filed and issued earlier which provide the very details of discretion of the issued in the various government agencies as we relate to the approval process for the various bromine plant. In the interest of time on this conference call, we will give you more conscious answers to this issue, so that there is time for Q&A session. However, the company wants to say that to order that all the complete details answers that have been reviewed by the company auditors and lawyers, investors should refer to the 10-Q for more detailed information. Second, what still needs to be done? As expected, that have been already completed their rectification, we didn’t expect area. But they ask you, the crude salt field area rectification did not finish yet. Question three, what’s the current schedule for reopening each of the bromine production plant, that past is production. And in particular when we factory one reopen, the opening of the factory will be determined by the timing of the approval of the government, it would not impact factory number one to have significantly different schedule than other factory. We’re however optimistic that this issue can be solved at all companies expect efforts. The chemical and the bromine industries are important in Shandong. We believe the goal of the government is to provide clear air and water for his people, but not to close important industries. Question four, have you decided reach of the alternative approaches as a presented in your maintains to the 2018 press release, your intent for the whole plant that did not has infection yet. And if not when do you expect to decide. The answer, we’re very close to sat all the issues for Factory No 10. The company is negotiating with a third party about the waste water discharge of the Factory No 10. If an agreement is reached, the company will invest additional RMB7 million to build a new aqueduct and discharge the waste water to the designated place by the third party for treatment. This would mean that there will be only three factories that could present a problem. These remaining factories have a slightly more complex issue that needs to be resolved. All bromine factories now require paired crude salt pans to prevent the halogen water resulting from the production process from flowing into the sea. These factories do not have a designated crude salt pan where the wastewater could be channeled. The company has four alternatives for these factories, which do not have paired crude salt pans: First, it can form partnerships with adjacent nearby bromine facilities that do have crude salt pans. The nature of these partnerships could take many forms. Second, the company could petition the government for a zoning change so that additional land for salt pans could be obtained. The Company believes this might be difficult but is worth pursuing. Third, the company could negotiate a different method of dealing with this issue; or, fourth, these factories could conceivably be forced to close. At the present time, the company is also working with the government on these issues and did not reach any final solution yet for the rest of three bromine factories. So now let’s look at question five. It is indefinitely closing those four plants field possibility, if the company can complete the negotiation for Factory No 10. There will be three factories potentially at a risk. As too soon together where the solutions can be found for these factories, however, as noted above the company is working with the government on this problem. Question six, what are the projected cost for the rectification cost in third quarter and fourth quarter 2018. In 2017, we spend approximately $17.9 million on rectification. In 2018, we have spent around $8.7 million on rectification. Our original estimate for rectification cost were $35 million. We now expect to spend $36 million the additional $1 million is for the building of aqueducts for Factory No 10. Question seven, what a level of bromine production in cost, do you expect for third quarter and fourth quarter 2018. Answer, the level of production in third quarter and fourth quarter depends on a timing of the approvals from the government. At this point, we cannot make a production. Now let’s look at the bromine business and its market. Question eight, what section of bromine production in China, do you expect will be permanently closed. We estimate that some maybe approximately 30% of bromine capacity in China will be permanently closed by management’s estimate. At the moment, there are several set of enterprises, the Shandong that have received final approval and are now producing. There are some smaller produces in [indiscernible] province. While Shandong province have many chemical companies in [indiscernible] the major problem is a pollution from iron and steel industries. Question nine, when do you expect crude salt planting for production of bromine in Daying County and how long do you expect such a project will need to before that bromine production. As we have noted the concentration of bromine in Daying County, Sichuan Province are extremely high. It’s our long-term strategy to develop and mind it reserves. However, I think we get our bromine and chemical operation in Shandong and our nature get businesses in Sichuan fully operational. We’re now to bring focus on Sichuan Province opportunity yet. Now let’s look at chemical business segment about its new facility. Question 10, can you provide an update – updated estimate of the schedule for the new facility. Question 10. Can you provide an update – updated estimate of the schedule for the new facility? When do you expect that these Daying new buildings to be completed? The company has secured from the government, the land use rights for its chemical plants located at the Bohai Marine Fine Chemical Industrial Park. And presented completed its construction design draft and the other related documents to the local authorities for approval. The company expected to receive feedback from the local authorities. However, the company does believe there could be a delay for the approval process given the ongoing rectification and approvals process for the company’s other plants and other industries. Question 11. When we expect construction to be begun? Answer, we hope to begin construction in first quarter of 2019. Question 12. When do you expect the building to be completed response? We hope to finish production before the end of – finish building before the end of – construction, sorry, we hope to finish the construction before the end of 2019 and to begin the production in the beginning of year 2020. Question 13? What’s your current estimate of the total cost? Do you have a breakdown of cost, building equipments, new location cost, any other? We continue to believe that it will cost around $16 million, most of this money will be for the building and equipment. And as soon as the company has the approval from the government, we provide the budget. Question 14. Do you expect cash outflow for the new plant to be in 2018 and 2019? Answer, most of the money will be spending to the year 2019. Now let’s look at the old facilities and land question for the chemical business. Question 15. Any update on what will happen with the land occupied by Gulf’s old factories? And will there be any short or long-term financial responsibilities regarding the chemical facility, short or long-term clean [indiscernible]. The company currently have done relatively minor cost for the old facility, sorry, for the old factory. For example, we have to continue to provide security and in the long-term, we want to see what the government has planned for the area. We can use the land and perhaps the building for some development, we can use the land itself or we could return the lease back to the government. Now look at – let’s look at natural gas project. Question 16. Is the installation of new equipment completed and is the oil piping complete is not going to expect them to be completed. Answer, the installation was completed in July 2018. Question 17. Is the schedule still to begin testing in August and trial production in September? Answer, we are now actively testing the equipment to make sure that it works and that there are no issues with water on purity, we will begin trial production in September. Question 18. How long do you expect the trail production to last? We expect the trial production to last for one year. Question 19. Do you already have customers for this natural gas will start producing, was your expectation for natural gas revenues in 2018 is the trial production is successful. We currently have some interest in customers, at this point it’s difficult to project how fast the trial production will run that. Question 20. When do expect the first well to be at a full capacity. We expect to be at full production around September of year 2019. Question 21. If everything is going fine, when do you expect the second well will be drilled. We planned to start to drill our next well in the second half of year 2019, if everything goes fine with our first well. Question 22. How long will it need to be trial production? From the time we start drilling, we expect it will take around 12 months to begin full production. Question 23. What would be your expectation for a number of wells drilled in the year 2019? Our current plan to drill two wells in the year 2019. Question 24. What’s your native cost estimate for the drilling of a new well? At the present we expect new well to cost approximately around $3.7 million – between $3.7 million and $4.5 million. Question 25. Are you still considering the possibility of partnership for the additional well, if the first two of three wells show that they are significantly natural gas reserve? Are there any ongoing partnership discussion? Answer, at the present time we are not having any discussion, we want to get the first well, first three wells operational before we enter into discussion with anyone. Question 26. Are you considering constructing a new chemical factory in Sichuan Province this is another long-term objective. However, it could be important our agreement with Daying County allows us to create halogen water and other mineral, the government of the Daying County wants not only to develop it’s natural gas resources but also to develop other industrial that could provide requirement, if we could do open a chemical factory to produce product derived from bromine this could assist our company in getting more drilling licenses, sorry, this could assist our company in getting more drilling wells not just for bromine but also for natural gas. Question 27. Are you still optimistic about alternative on natural gas in Sichuan despite the problem we have encountered we are actually more optimistic, we have overcome the discourage we have faced, so we are now more confident about the future. At the same time, the government policy of closing coal mines and fortune businesses like our bromine factory to use natural gas and electricity that coal has created energy shortages China. Last winter some factories in Northern China were closed because there was not enough natural gas. The demand for natural gas as a clean fuel is increasing sharply. We believe we can be a part of the solution. Now let’s look at shareholder value section. Question 28. We appreciate the commitment of the Chairman to buy more shares. How many shares have he been able to buy thus far? If he has been able to start buying, when do you expect them to be precision to do so? Why is it taking so long to get this action going? The answer, the Chairman has not yet purchased any share, if he had we would have reported immediately. In attempting to purchase share, the Chairman encountered a number of problems and difficulties. The first was that he need to setup an account that could trade in U.S. secured, as we have noted before this has been not easy and very difficult. However, it appears that this problem has been solved now. The second problem in that, China has been more aggressive in rejecting its citizens from taking money out of China. This is a continued problem but we do believe there are ways to accomplish this. Finally, only the guidance from the company inside our trading policy, we have been in a blackout period. Normally the blackout period occurs before the – occurs before the [indiscernible] reported. In this instead as well of ongoing discussions with the government about closing and reopening of the bromine factories and chemical factories, our Chairman is committed to buy the share, he promised. He indicated, that he will purchase his shares as soon as he is given the clearance and a change in the future when we have time. Question 29. Can we expect that the company will also take some limit in major to support the stock price in the near-term given that the delay in preopening the bromine plant has had a negative effect on the stock price, if so what major is the company prepared to take? As noted in the answer about, the company is not currently in a position to buyback stocks more significantly the company believes that the best strategy for the shareholder is to gets it factories and natural gas producing and reopening and generate profit at a higher level. Question 30. Shareholders appreciated the fact that you communicated about the status of the bromine production facilities and natural gas equipment delivery, we would encourage you to continue communicating good of that news between the quarterly earnings. Are you planning doing so even more in the future? Answer, we are trying to communicate with shareholders much more consistent basis, when something happens, whether it’s good or bad we will issue a press release. Other questions – question 31. What impact the U.S. tariff on Chinese goods might have on profit sorted. With the change of the depreciation of RMB and trade of war between U.S. and China, we believe that imported bromine becoming more expensive, as a result the company anticipated that low quality supplied bromine could become more popular as price could trend up the company is optimistic about the long-term earnings potential in the company’s bromine as push out segment. Question 32. As you know the latest conference call was very difficult to understand. On November our answers were not audible, would be willing to provide an additive conference call transcript of that conference call to ensure that a shareholder can understand the questions and answers, which is something that shareholder consider important for better communication with the company. Answer, we will provide an additive conference call transcript of the conference call to ensure that shareholder can understand the questions and answers. We have no controls of the government but we are committed to improve our communication with our shareholders and investors. So with this also the questions, we received until now and with order responded answers. Hi, operator. Can we open up for the question part – Q&A part?

[Operator Instructions] Your first question comes from the line of James Meyer. Your line is open.

Hello, congratulations, first of all to your accumulation of net-net worth capital over all the years. I have one question about the government evaluation of your bromine rectification plans and the environmental situation. Can you give a little bit more color to this? Thank you.

Again, I think this question, I don’t want to see in more detailed necessity from the beginning. The Company’s 10-Q and the press release issued that we would have more detailed information about it.

Thank you. Is it correct that the environmental issues have been completely resolved except of course, three or four of facilities?

No. The first six facilities have already complete the rectification in these metro areas but as we cross out viewed areas rectification did not finished yet for this six – yes, and for question 10, raising on the discussion with third-party to build a product through transfer – allowing what our tools, we are designing today, this is what actually intend and the rest three factories did not have a final solution, yet and the company is still on the discussion with government and its related parties.

Understand. Your company and for example, Mr. Ming, the Chairman with his own company are also in direct contact with the provincial government. Is it correct?

Sorry, I didn’t get you, apologizes, if you…

In your 8-K or 10-Q filings, you mentioned that, the union or the local government is helping you to communicate with the provincial government for the approval. But I do…

The bromine association. The bromine association is returned all bromine factories in Shouguang City. It’s helping the company to do negotiation with local government.

Okay. So you cannot give any more color. But you will provide color as soon as possible. Is it available?

Yes.

To our knowledge there was a good rating from the government regarding the evaluation of your progress. Is it correct?

We cannot say that until we know, because we did not talk we finished yet. But for the first six factories, the company – yes before, they did – do it. But later on the year, several policies come out. So if you look at Company 10-Q and press release, you’ll have more details. Since the beginning on because the policy come out one-by-one, all have effect to the company’s current situation.

Okay. Thank you very much.

Okay. Thank you.

[Operator Instructions] The next question comes from the line of [indiscernible]. Your line is open.

Yes, good morning. Can you hear me?

Yes.

Okay. I have several questions. My first question is the six bromine facilities that you have spent the $30 million on to date that equal how much prior production?

Okay. How much processing fees production is accounted for the company, right?

How much of the total – in the past, like in the past, the six facilities that you’ve already spent the – that you’ve already spent the money and attempting to permit. What percent of the output does represent? Simple question.

Okay. Yes, I got you. Then your next question. Do you want add one-by-one or…

Let’s do one-by-one.

Okay. [Foreign Language]

[Foreign Language]

[Foreign Language] Okay. These six factories which is represented 60% of the total production of the prior company’s production capability.

That was 60 – 60%?

Yes, 60%.

Okay. My second question is – given the situation why have you waited till 2019 to rebuild the chemical facilities, why not – why was this not done earlier?

Okay. [Foreign Language]

[Foreign Language]

Okay. [Foreign Language]. Here is the response for your question from Mr. Liu, the CEO. He said that, the company also want start the construction for its chemical companies as soon as early as it can. But it’s not under the company’s control on it. Because, first of all, the Company had to buy land, get land in the rural area, by the government designed that’s where we located in this chemical and the area. And listen the company have to design, like we mentioned in our press release and 10-Q that the company had submitted its completed draft design and as it related papers to the government and getting the approval, get the feedback and get approval. And this approval is not well approval – as there are several approvals which need in this project, like the environmental approval for 50 production, planning approval and project approval. Here let me get the all approval then the country – the government will issue the company construction of factory permit, then that company can start to build its factory. So Company will tries back to get all these done as soon as possible. But to get all the related approval – if we have to get all the related approval first from government as well as if you will be like a legal in the future on the construction.

Thank you. My next question is, in the past, the company has indicated that it needs substantial re-cash as balance sheet in order to pursue the natural gas opportunity that the local governance wanted to see the substantial asset cash given that you’re likely to spend $60 million on chemicals, $30 million on bromine to date, another $40 million potentially more is the company recorded the efficient that continue the well program – did natural gas program.

Okay. [Foreign Language].

[Foreign Language]

Okay. Yes. So based on this external situation and the company did on time and principally communication discussion with Daying County local governments about our current situation and about our rectification program in Shouguang, and the local governments from the county also expressed that they understand the situation, because overall the whole country during the – and they understand the coming situation and they think they also want to the company to finish its rectification program in Shouguang first.

Okay. And can you further explain to me the $40 million in the press release is that were the existing six bromine and salt facilities or is that for other facilities, I was confused what the $40 million? Where it’s being spent and why it’s being spent? I guess that’s my question. Why and where is the $40 million in the press release being spent?

Okay. [Foreign Language]

[Foreign Language]

Okay. The answer from Mr. Liu that this $40 is for all the 10 factories wells that only half of this 10 factories wells. We do upgrading…

Helen, Helen.

Yes.

There’s background noise. I can hear nothing, there’s background noise.

Okay, okay. Wait. [Foreign Language] Right. Okay. Is it clear?

Yes. Sorry, I didn’t hear one word.

Okay. I will say again. So here that answer from Mr. Liu that this $40 the company is plan to spend in 2018 is for all our 10 factories, 10 bromine factories, half of the wells from the 10 bromine factories. We want to upgrade those wells and keep running them, because some of the wells are really old, and we need to go further making wells more deeper than have more halogen water come out.

[Foreign Language]

Okay. So this year we plan to do 50% like half of the wells of this 10 bromine factories, next year we will do the rest half upgrade. The major with for doing this in that because most of the wells are more than 10 years and which is beyond their usage and have leakage problem. Government does not allow this to have, which will – like sending to the nearby lands. So the company also wants – first for its steps, secondly for accomplish for the government policy and to do the better condition for future.

Helen, I’m confused. So how can the company get the ability to open the six well if you have the issues with the salt mine and you need to spend another $40 million, I don’t understand how you’re going to get them open with that outstanding problem?

No, no, no. This is not like outstanding from, it’s the companies own, because the well is old, and the company wants to protect this.

Though it’s environmentally you think sound, but you want to expand the – you want to expand that to be – you want to upgrade the facility, but you think it’s functional?

No. We want to make the wells better, have a longer life.

Okay. So you would…

And the government also encourage company to do this.

Right. But this is – but this $40 million is for all the wells not just the six wells, I mean the six facilities, is that correct?

Yes. For all the 10 factories, half of the wells from the 10 factories, it’s a budget, but we don’t know because the rest three factories we do not know if they are going to get approval yet.

Okay. My last question is, I believe in the past that you’ve indicated that a natural gas wells, I bought and I could be wrong you would said about $2 million per well. Today you’re indicating about $3 million to $4.5 million, am I incorrect that in the past it’s been $2 million per wells, it’s my memory wrong?

I will double check, okay. [Foreign Language]

[Foreign Language]

I think maybe there is a misunderstand or mistake, this for regarding your $2 million memory regarding per well. Because our current well, this first well which cause more than $6 million near $7 million well, the first well. So in the future budget like maybe around $3 million to $5 million per well that is definitely cannot be down within $2 million.

And what is the natural gas exploration budget for calendar 2018?

2018 if our first well goes fine, we want to do two more wells in the next half of 2019.

And how may wells if you drill – have you drill today?

One.

And what was the result of that well?

It’s under – it’s just finish this, let us do under testing, and it was the product testing. Like we say that it like a response of this question just now in 2022 and 2023 about like how – about the natural gas well like – wait let me check, what’s the well scale or schedule to begin test in August and trial product in September the first well, and is expect to sell production last for one year.

Okay. So if you haven’t have the results of the first well that you’ve spent $6 million to $7 million on, why are you pursuing another well, I’m confused?

It’s like the first well trial production will finish around September 2019, and the company’s has scheduled for two wells for next half year of 2019.

So there is no capital spending on natural gas wells in 2018, all the money was spent last year with $6 million to $7 million was spent and now you’re awaiting test results is that accurate?

Yes. I think so, wait I would have a confirm. But I think so. [Foreign Language]

[Foreign Language]

Yes, on the spending its correct, so there will be normal like major capital expenditure for the first well, but except we will maintain its cost.

Great. My last question and I know that’s a lot is, how much of this $60 million for chemical and the $40 million for the salt mines going to be spent in 2018?

$40 million, do you mean the additional $40 million budget. Right?

Yes, how much of the $40 million additional and the $60 million chemical will be spent in 2018 and then the rest will be in 2019?

Okay. [Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

So first we will talk about $60 million budget for chemical sediment, the first $20 million around, less that $20 million which we will be spending in the year 2018, for its launch and designing and related preparation for all the approvals, then the rest $40 million for chemical that will be spent in the year 2019. This is for the $60 million for Chemical sediments. Thank you.

Yes. So the answer is 2018, $20 million.

Yes, $20 million in Chemical and $40 million in 2019. And let’s talk about the $40 million, the $40 million for bromine wells, they are two-thirds of $40 million will be spent in the year 2018 and the rest will be spent in the beginning of the year 2019 but before the 10-K is filed

So, two-thirds, 60% will be spent in 2018 of the $40 million?

Two-thirds of the $40 million, yes, will be spent in the year 2018 and the rest ones that we will spend in the beginning of the year 2019.

So, total capital spending for 2018 is going to be $30 million, that’s been spent on the bromine facilities to-date, $20 million for the chemical and two-thirds of $40 million. Right?

Two-thirds of $40 million and plus $20 million. Yes.

So, total capital spending for 2018 is projected at what number? That’s my last question I promise? Capital spending 2018?

Of course I bet, for the 2015 – 2018 would be around $46 million – the rest year of the Capital Spending, which will be $46 million.

No, I’m asking for total capital spending, the total for the company, what is the projection for 2018?

Wait. [Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

Hello.

I am just living one number estimated to be capital spending what is that?

$65 million, around $65 million total for the year 2018.

But, Helen I got $25 million is two-thirds of $40 million.

Yes.

$20 million for Chemicals and $27 million you go forwarded in spent on the existing Bromine that’s definitely $1 million, so some number you gave me is wrong.

Some number is wrong is in my calculation. First of all we will [indiscernible] wait.

[Foreign Language]

[Foreign Language] In my calculation, so $20 million for Chemical, and then two-thirds of the $40 million which is around $26 million, right?

Yes, I have $25 million here.

And, $1 million for Factory No 10.

The $27 million. Yes.

Okay?

Okay.

And, for the bromine rectification which posses’ $35 million budget and the company already spent $18 million, so the rest $17 million will spent only in year 2018.

I thought you said in the press release you spent $27 million of a budget of the $30 million, is that?

Yes.

And the $27 million – so the $27 million was spent in 2017, 2018, when was it spent, the 27 million?

In year 2017, we spent $17.9 million, and in the year 2018 we spent $8.7 million, so this – $8.7 million should be in the year 2018 budget.

Okay, alright. Okay, I am very clear. I didn’t recall that part of the $27 million was spent in 2017, I apologize, thank you very much for answering these question. I think it’s much – I think you painted a very clear – a clearer picture. Thank you for that. Thank you very much.

Okay. If you have any questions feel free to email me.

Thanks, I’m good now. Thank you.

Okay. Thank you. Have a good day. Bye-bye. Hi, Operator, I think no more questions and our time is out, can I close for the call today?

Go ahead.

Yes, can I close for the call today?

Sorry, do you have any closing remarks?

No, just simply close the call for today, thank you. Have a good day.

That concludes today’s conference, you may now disconnect.