Trecora Resources
Q2 2018 Earnings Call Transcript

Published: 6 Aug 2018

[Operator:]

Good day, and welcome to the Trecora Resources Second Quarter 2018 Earnings Conference Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Jean Young with Piacente Group. Please go ahead.

[Jean Young:]

Thank you, Riley, and good morning, everyone. Welcome to the Trecora Resources Second Quarter 2018 Earnings Conference Call. The earnings release was distributed over the wire services after the close of the financial markets yesterday afternoon. Presenting on our call today will be Simon Upfill-Brown, President and Chief Executive Officer; and Sami Ahmad, Chief Financial Officer; Chris Groves, Corporate Controller, will also be available for the Q&A session. Following the management's prepared remarks, there will be a Q&A session. Before we get started, I'd like to review the safe harbor statement, which is found on Slide 2. Statements in this presentation that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on management's beliefs and expectations only as of the date of this teleconference, August 2, 2018. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected. These risks, as well uncertainties are discussed in greater detail in Trecora's filings with -- including the company's Annual Report on Form 10-K for the year ended December 31, 2017, and subsequent quarterly reports on Form 10-Q. This webcast is accompanied by a slide presentation that is available on the company's website, www.trecora.com. At this time, I'd like to turn the call over to Trecora's President and CEO, Simon Upfill-Brown.

[Simon Upfill-Brown:]

Thanks, Jean, and thanks to everyone joining the call this morning. While we achieved important milestones and made great progress in several key areas, in total, our second quarter financial results were disappointing. Second quarter adjusted EBITDA decreased 25.8% compared to the same period last year to $6.2 million, and adjusted net income for the quarter was $2 million. Reported net income in the quarter -- in the second quarter included equity in earnings from AMAK of $0.2 million, which was the third consecutive quarter of positive contribution from the mining operation. While our results in the quarter fell short of our expectations, primarily at South Hampton, we are beginning to realize the benefits of our multiyear capital project campaign as well as the foundational steps we've taken with our transformation plan. Now to the details of the quarter in Slide 3. With the commissioning of the advanced reformer in July, we are excited to have our last major capital project completed. Not only does this start to position us with the state-of-the-art production facilities to serve the research and chemical market, but it allows our teams to singularly focus on improving the consistency and reliability of operations. Our plead is in place, we are excited about our ability to generate solid returns in the future. Looking at Southampton, all in all, it was a disappointing quarter. We experienced order disruption at several specific customers, as they dealt with their own production issues. As a result, we saw a significant reduction in order volume. In addition, higher operating costs, including nonrecurring costs like overtime training and contract labor related to the commissioning of the advanced reformer, combined with low operating leverage, negatively impacted margin in the quarter. Sami will discuss these and the additional costs, even [ph] rail car management in more detail later. On the other hand, Trecora Chemical delivered solid results in the quarter, as we generated record wax revenue over near record wax volume. This was despite experiencing a late quarter wax in custom processing production disruption that continued into the first few weeks of July. TC [indiscernible] driving a culture of operational excellence with, a focus on reliability to meet the strong customer present demand we see in the market. AMAK did show cash flow improvements delivering $8 million in net income before depreciation and amortization, resulting in $0.2 million in equity earnings to TREC in the second quarter. You will have seen in the 8-K a refinancing of our credit facility, and Sami will discuss it in more detail. Our investments in production facilities as well as organizational changes and process improvements we are making laid the foundation for us to participate in the resurgent [ph] North American eco industry. Slide 5 [ph] shows a quarterly breakdown of total [indiscernible] along with deferred sales of Southampton resources. While prime product volume is down year-over-year and quarter-over-quarter, material costs and rising end market prices helped mitigate the impact. Customer operating issues negatively impacted volumes as well as a sequential decline accentuated by non-recurring volume from [indiscernible]. Byproduct volume was down in the quarter, primarily as a result of building -- in anticipation of the commissioning of the advanced reform. The recent smooth startup of our largest of project will allow us to benefit from the byproduct margin uplift, as product -- production is optimized through the third quarter. International sales volumes in the second quarter were 21.5% as compared to 22.1% in the second quarter of 2017. We often experience fluctuations in international quarter-to-quarter. You will recall, we were about 25% into sales volumes in the first quarter of 2018. We continue to focus on growing international business, with a focus on South America and Southern Asia. Currently, we conduct no business in China or the European Union. So while we continue to monitor proposed tariffs, today, we expect no impact from such actions. Our customers appear confident that tariffs are unlikely to impact their ability to compete as well. We continue to ship to the new PE customer in the Middle East, and follow-up shipments of the large order we received from a PE plant in Asia are expected in coming months. We continue to work closely with technology providers to track and grow with the new capacities outside the U.S., leveraging our ultra-high purity products, exceptional customer service and responsive supply chain. As our customers work through their production issues, we expect a return to growth in the second half of 2018. We expect first flow of orders from a new North American PE customer that is due to start up in the fourth quarter. In addition, for the second Canadian oil sands customer, reliable on purpose supply has positioned us well. It is just taking longer to bring this customer on board. We expect to have this in our plan for 2019. Petrochemical capacity utilization in the quarter was 50% compared with 56% in the second quarter of 2017 and 56% in the first quarter of 2018. Capacity utilization is based on 1,000 [ph] barrels per day of fresh feed for both years. While fusion margins has improved from Q1, they remain under pressure, SHR, as a result of ongoing increases in natural gasoline prices and slow to adjust end market. Sami will discuss this in more detail. The photograph of the advanced treat [ph] on Slide 5 is the same photograph we showed you but this time, it is up and running. We are very pleased to have this $58 million project in service, and we'll continue to optimize performance during Q3. Margin uplift is holding well, even though benzene prices have been under a little pressure. As we sell more pentane, EBITDA from this unit will grow, with the expectation that it will deliver between $12 million to $14 million in annual EBITDA by 2022. Turning to an update at Trecora Chemical on Slide 6. TC delivered solid results in the quarter, with revenue up 7.9% year-over-year. Wax volume increased 10%, and Q2 revenue increased 14.2% year-over-year to a record $7.5 million. Average wax selling price increased 4.4%, reflecting a marketing strategy to enhance pricing into sale -- into higher value markets. Despite the strong results, we continue to experience supply issues for our wax feed. Second quarter custom processing revenue declined 1.9% compared to the second quarter of 2017. We experienced a number of plant issues during the quarter and struggled to meet demand. We believe there are significant opportunities for improving reliability and efficiency, and we are implementing steps to get us where we need to be. We have made several organizational changes to focus -- to enhance our focus on production. And we expect to see the benefit -- benefits of these changes in the near future. We have put together -- on Slide 7, we -- an executive team that can get us where we need to be. We mentioned Peter Loggenberg on the last call. He is our ideas man and is already working on a number of exciting initiatives. On the last call, I also mentioned I was spending considerable time in our two sites. It became clear we had a lot of work to do. And we were very fortunate to have Dick Townsend offered to step down from our board and lead the manufacturing changes to bring us to the highest level. It was also clear that we needed to focus on the value and market segmentation aspects of our total commercial efforts. We are very pleased to have Mike Humby driving to the outcomes we expect in the marketplace. Safety is always priority 1, and we will be playing very close attention to both behavior of human factors and process safety. Gun [ph] standardization across the sites sites, so that people speak the same language. The organizations are aligned and roles and responsibilities are clear with all ambiguity removed. Appropriate training is being implemented to ensure our group base have the skills to execute tasks safely and efficiently. Turning to Slide 8 to show a few key focus areas. Mike will be leading efforts to take full advantage of our market position and service reputation to unlock additional commercial value at both SHR and TC, with an emphasis on customer and market segmentation. Clearly, cost is a focus, the overview of appropriate headcount and managing the internal rail costs are already under full review. We haven't done [ph] -- we will see improvements in these areas. For example; advanced analytics help us in a deeper understanding of our chemical processes to improve control and more consistent and reliable production. We will not compromise on safety, however, but we'll do our best to manage expenses on the process safety and equipment integrity side of things. Obviously, we will also work on the longer-term aspects of our business to avoid surprises and ensure we are successful in the long term. Turning to Slide 9 for an update on AMAK. It is encouraging to have AMAK contribute equity and earnings to TREC for a third consecutive quarter, with a significant sequential increase in concentrate sales. As a result of the higher production, AMAK delivered $15.3 million in net profit before depreciation and amortization in the first half of 2018 compared to a net loss of $4.1 million in first half of last year. So a swing of just under [indiscernible] million. The Guyan gold sector has experienced some delays with commissioning, now expected by the end of 2019. But this allows time for more drilling to better characterize the various gold veins. Progress on the precious metal circuit has been slow, but improvement continues. And AMAK expects a silver doré sales in the next couple of months. Although metal prices have fallen from recent highs, copper is down 14% and zinc up 21% from recent highs. Copper prices are up 40% and zinc prices are up 70% from the lows when AMAK was closed down for refurbishment in November of 2013. On July -- the SIDF loan was amended about the repayment schedule, and terms were extended through April 2024. Our first payment is due in June of 2019. We are encouraged by the growing consistency of operations and financial results at AMAK, including the more predictable cash flow generation. These developments certainly make our minority share more attractive to potential buyers. [Indiscernible] shows the continued solid improvement in Q2 in -- metal recoveries fell slightly during the recent quarter due to a recurrence of water quality issue. Fortunately, this was quickly resolved, and recoveries have continued on their upward trend. AMAK expects to be able to show sustained improvement in the coming months, and with a strong first half, we continue to be optimistic that 2018 will be a good year. Now, I'll turn the call over to our Chief Financial Officer, Sami Ahmad, for a more detailed update on the results.

[Sami Ahmad:]

Thanks, Simon. Good morning to everyone. Slide 11 provides a brief financial summary of the second quarter of 2018. Net income for the second quarter was $2.2 million or $0.09 per diluted share compared with net income of $0.8 million or $0.03 per diluted share for the second quarter of 2017. Net income for the second quarter included a benefit of approximately $0.05 per share attributable to the reversal of stock compensation expense and postretirement obligations related to Mr. El Khalidi, a former CEO of the company. Mr. El Khalidi's case against the company, which had been long going, was fully dismissed by the Texas Supreme Court in May. These amounts will be disclosed and discussed in the 10-Q, which we plan to file next week. Net income for the second quarter includes equity and earnings of AMAK, with an estimated after-tax impact of about $0.01 per diluted share. In the year ago period, net income included equity and losses for AMAK of [indiscernible] per diluted share. Adjusted EPS which excludes AMAK, was $0.08 per diluted share in the second quarter of 2018. Adjusted EBITDA in the quarter, which excludes equity impact of AMAK, was $6.2 million, representing a 9.1% adjusted EBITDA margin compared with adjusted EBITDA of $8.4 million, representing a 13.5% margin for the same year -- same period a year ago and adjusted EBITDA of $7.2 million in the first quarter of 2017. [Indiscernible] product margins continue to be pressured by increased -- cost during the quarter as well as throughout the year. Benchmark Mont Belvieu [ph] natural gasoline prices are up approximately 44% compared to second quarter last year and approximately 9% increase compared to first quarter. Second quarter prime feed margins did benefit from price increase and improved sales mix. In addition, South Hampton also had significantly higher operating cost, which contributed to the margin decline. The main drivers for the increasing -- for increased operating expenses were labor costs, maintenance and transportation costs. Labor costs were higher primarily due to overtime training and contract labor associated with the startup of the advanced reformer unit. We estimate the additional non-recurring costs associated with the startup to be approximately $1 million. Transportation costs were higher primarily due to an increase in the third-party freight costs associated with governmental mandates which took effect in mandate in the first quarter of 2018 and an increase in the cost of rail freight due to higher rates and storage and switching costs at a third-party rail yard, which we -- which we're not able to recover from customers. We're actively working on reducing overall costs of South Hampton and specifically addressing internal rail costs while maintaining our high service business model, which is a source of competitive advantage. Trecora Chemical's EBITDA margin was 11.1% in this quarter, which is higher than the first quarter of 2018 and also higher compared to a year. While some of the headwinds to margin, we believe, are temporary, specifically the costs related to the startup of the advanced reformer, we're also taking active steps to improve margins. At South Hampton, we announced price increases for prime products late in the second quarter and are considered additional price increases. Additionally, incorporated [ph] stock cost seems to have moderated and finally, added value created by the advanced [indiscernible] will benefit margins overtime. G&A expenses were $4.6 million in the quarter. They reflect approximately a $1.6 million benefit from the cancellation and reversal of stock comp expense and other postretirement benefits that I previously discussed. CapEx for the second quarter was $4.4 million. This was mainly for the completion of the advanced reformer unit. And cash flow from operations for the quarter were approximately $7.1 million. Long-term debt, including the current portion but excluding loan fees, was $105.4 million as of June 30. This compares to $99.6 million at year-end and $107.5 million at the end of the first quarter. Revolver borrowings remained at $45 million at the end of second quarter, unchanged from the first quarter. As we announced yesterday, on July 31, we refinanced -- we closed on the refinancing of our credit facility. Under the amended facility, we have extended a maturity to July of [indiscernible] from October of 2019. We've upstated [ph] the revolver to $75 million, lower the booking [ph] by about 50 basis points; the increased financial covenant flexibility, including raising the maximum consolidated leverage ratio to 3.5

[Simon Upfill-Brown:]

Thanks, Sami. To recap on Slide 16, I just need to apologize for the sound system. I understand it's very variable over the web, and we've been working on trying to fix it. So sincere apologies for that. I'll speak as loud as I can. In total, we must describe our results in the quarter as disappointing -- volume came in below expectations and higher at SHR hurt margin significantly. That said, there were certainly some bright spots in the quarter. With our -- capital plan now complete, we can shift our focus to efficient and reliable execution. Our upgraded executive team, along with the organizational operational changes we have implemented, are designed to do exactly that. We generated record wax revenue and near record wax volume in the quarter despite some supply challenges and the production interruption late in the quarter. And finally, we continue to see improved production from our AMAK assets, which drives its near -- and generates growing interest in the asset by potential acquirers. History dynamics remain strong, and we expect -- in the expanding -- petrochemical production capacity on the Gulf Coast and stronger demand from polyethylene manufacturers in many parts of the world. We also look forward to some volume from the second Canadian -- customer in 2019. Improving discipline will allow us to capitalize on strong processing demand. The advanced reformer positions us to deliver significant EBITDA improvement by increasing the value of our byproduct. Although there is -- work to be done with reliability, the hydrogenation distillation is expected to show more progress in the coming months. AMAK delivered strong net profit before depreciation and -- and a third consecutive quarter of equity and earnings. Continued operating improvements and consistent cash generation boost our optimism about our ability to monetize our investment in asset -- in the asset in AMAK in the not-too-distant future. This concludes my prepared remarks. At this time, I'd like to ask the operator to open the line for Q&A.

[Operator:]

[Operator Instructions] We'll take our first question from Sarkis Sherbetchyan with B. Riley FBR.

[Sarkis Sherbetchyan:]

So just to kick it off. Sami, you mentioned the non-recurring expenses to start up the reformer unit, I think it was about $1 million in the call. Do you expect some of that pressure to continue here in 3Q with the units starting in July?

[Sami Ahmad:]

It should be minimal. I don't know if you can hear me well or not, but I said it should be minimal. The non-recurring piece is in second quarter mainly.

[Sarkis Sherbetchyan:]

Got it. And with regards to some of the customer production disruptions with regards to the volume number. Are those customers, kind of, resolved, as far as the disruption they experienced? Or do you anticipate on recovering some in 4Q?

[Simon Upfill-Brown:]

There is -- Sarkis, one of the major reasons for our shortfall is starting back up. They're expecting to take volumes again next week, so that's a good sign. There are really significant user. The other one -- we had a couple of issues at 2 sites, also we're expecting some increase there, but then they have another planned turn around at the other. So -- but overall, the plan is harder right now. So we do expect an improvement in the third quarter and fourth quarter in volumes.

[Sarkis Sherbetchyan:]

Understood. And I think on the slide -- the hydrogenation and distillation unit, said that the $6 million to $8 million per year in EBITDA run rate is delayed into 2019, can you give us some more color around that statement?

[Sami Ahmad:]

Well we've had a number of -- with that unit. And not so much with the unit itself is running fairly well. It's been ancillary equipment breakdowns and things like that, that have [indiscernible]. So I think we've become a little bit conservative on how quickly we're going to be able to reach those targets. Well, they're still very reachable, it's just that, to get this all sorted out, it's going to take us a little bit longer than we desired. One of the things we spent quite a bit of time on last quarter and early this quarter is how the change from one service to another service and taking one product to another product. And we struggled a bit and we had some very key learning's and expect that to go a lot quicker next time. But we've just started to feel that we don't want to be too aggressive here on having this all sorted out by the end of the year.

[Operator:]

And we'll take our next question from Mitch Sacks with Grand Slam.

[Mitchell Sacks:]

My question -- two questions; one is on the high. Can you just kind of walk us through how that comes online and you start -- news from that -- and TC?

[Simon Upfill-Brown:]

I think you cut out a little bit on that. Mitch, was it the hydrogenation unit you asked about?

[Mitchell Sacks:]

Yes.

[Simon Upfill-Brown:]

Well, it's online. We don't have catalyst issues, which is what we had last year, catalyst seems to be fine. Most of our issues are on ancillary equipment and then what I was just describing to Sarkis is how do we this from one product to another product. We still have a little bit to learn on how is -- that's really holding us up a little bit.

[Mitchell Sacks:]

Okay. And then with respect to the volume that was lost last quarter from the customers that had shutdowns, when you lose that volume, that volume is just kind of permanently lost? Or is that -- does the customer ever catch up in some way to make up for the lost volume?

[Simon Upfill-Brown:]

I think the customer will catch up. And we expect additional volumes in the second half of the year, right, but we don't think they will catch up on the full year numbers. Because they were expecting to run pretty high during the whole year anyway. So it's not like they have a whole bunch of spare capacity. It's particularly -- it's a polyethylene guy [ph]. I mean, they're -- they can when they're up -- the polyethylene guys are making a lot of money now. We don't think they can pick up what was lost.

[Mitchell Sacks:]

Just as -- I mean -- but literally I'm missing every other word from the presentation and the response. So I'll call off, it's been very hard to follow the call.

[Simon Upfill-Brown:]

I'm so sorry about this. It's very, very frustrating. We don't know why but we tested everything beforehand. But -- there's a glitch in the system. If we can set up a call later with you, Mitch, and with anybody else who's having trouble.

[Operator:]

And we will take our next question from Joseph Reagor with Roth Capital Partners.

[Joseph Reagor:]

Hopefully, you can hear me okay. Sarkis said a bunch of stuff I was going to ask but just some, I guess, extra items. G&A is kind of been bouncing around, to say it nicely. In the quarter, you guys, your total G&A line was like about -- million. Last quarter it was $6.3 million for the 2 entities. Can you guys give us some kind of color on what we should expect going forward? Were any of those savings in Q2 potential carryforward savings? Or is that just an odd quarter with the lower G&A rate?

[Sami Ahmad:]

Right, Joe, I think, the cost that we -- the reversal, that was odd. So I wouldn't use the second quarter the 4 5, 5 4 number that we reported on an annual basis, because obviously that was onetime, kind of, number. I think that, overall, G&A, we're not expecting much growth year-on-year, I'm talking about 17 to 18 full year basis. Our expectation is that number will be in the 2% to 3% increase adjusted for this onetime deal. So that's what I would do.

[Joseph Reagor:]

And then on the volumes and the margin at South Hampton, volumes have been very difficult to predict. I know you guys have had, like this quarter, specific customer, who is the problem. But any color you can give us as far as on the volumes we should be thinking about moving forward, anything as far as growth that you want to remind us of over the next, call it, 4 quarters? And then specifically on margin, even though a lot of it's been cost pressure on natural gasoline, is there anything else that's been squeezing your margins because they have steadily been declining since about the middle of next year at South Hampton? Middle of last year, sorry.

[Sami Ahmad:]

Well, let me take the margin question, Joe. You're right. So if you look at that slide 13 that petrochemical feedstock cost mentioned middle of last year and you look at how process cost as well as market prices have increased, that kind of growth we've not seen going all the way back to, at least on this chart, January 15. And as we've discussed before, 2/3 of our volume is formula based with that 30-day lag and you can kind of do the rough math. We get squeezed if the costs are growing at that rate. Now on the formula piece, we recovered but -- this in the quarter for that 30-day lag. On the spot side, it's definitely are squeezed unless we can raise the prices. We've as I mentioned able to raise some prices and we announced a further price increase in the -- towards the second half of the second quarter. Hopefully, we'll see the benefit of in the third quarter. And then I would say with -- recent numbers around feedstock through the last few weeks that moderated. And we'll see that there's a little bit of a lag based on our buying. We don't buy ratably throughout the month, based on -- but anyways, you will see the effect of that [balloon] as the price reduce our process cost. And then finally, I would say that in terms of overall margins, we're still seeing the $0.40 uplift from -- and if you just pro forma -- the advanced reformer unit at the beginning of the year. And through the first and second quarter with those volumes and those prices that actually existed. That benefit roughly is about $3 million to $3.5 million of incremental EBITDA. So assuming those conditions hold and the unit continues to line out as we're -- as it's doing, that gives you some idea of the benefit that we should see. On the volume side, I'll turn it over to Simon.

[Simon Upfill-Brown:]

Yes, I mean, we had a couple of -- who are down as we mentioned. Our run rate right now in the plant are significantly higher than they were in the second quarter. So we run for demand, right. We run in order to satisfy what our customers want. So we are expecting a good volume increase. It's hard to know exactly where that's going to end up. The fact that things are running harder is a good sign. As we mentioned, those customers that was down for most of the year since that we had down here in late January, early February, they're starting back up now. There's the next polyethylene guys starting up in the fourth quarter. We're expecting first full volumes from them in the very, very near future. The PE guy who started up last year, he is still not -- he's still running at about the 70% rate. So we could get more from them as well. So there's -- all the things that we are expecting to happen are happening, it's just taking a little bit longer than we thought.

[Operator:]

And we'll take our next question from Jon Tanwanteng with CJ Securities.

[Jonathan Tanwanteng:]

You're going to be -- the transcript where I can actually hear things.

[Simon Upfill-Brown:]

Well, I don't know what the transcript is going to be like with these gaps. We'll see. Sorry.

[Jonathan Tanwanteng:]

We'll see what happens. In your slide deck, you talked about a potential size of the investor buying your position in AMAK. Can you go deeper into that and monetize the stake and kind of the timing, and if that's the route you're trying to go?

[Simon Upfill-Brown:]

Well, the issue is, I think, from somebody outside that -- we discussed this in the past, is buying a minority position in the mine 100 kilometers from the Yemen border, there is not a lot of outside Saudi interest in that. I mean, we're testing it as best we can, Jon. But the big thing that Saudi investors like is dividends and cash generation. So if the mine can consistently generate cash and, in some form or fashion, find a way to return that to shareholders, then that becomes very, very attractive to Saudi shareholders. So what we're saying is that Saudis are potentially the most likely buyer of that asset. And I think that's really where we're probably going to have to look to focus our attention going forward once we've been through some of these other things that we're looking at. The big thing is that -- the big change is that -- it's less of cash being -- it's cash already being generated and very appealing to the Saudi investor, combined with this whole Vision 2030 and drive to be a non-hydrocarbon economy and all those kind of things. So that, I think, is why we're feeling that's the way to go.

[Jonathan Tanwanteng:]

Okay. And then just to be clear, has all the production issues with customers been resolved in July and beyond? Or is there still some ramp up to go, kind of, slowdowns that you see in the quarter?

[Simon Upfill-Brown:]

Well, there are 2 major ones, there are a couple of other little ones. You always have things and roundabouts. You gain some, you lose some, right. But the 2 major ones, one I mentioned already, that's starting at in next week. We should start shipping again. The other one does have another shutdown planned during the form -- so we're a little bit less certain about that one. But they have been taking volumes in recent weeks. so we'll have to see exactly about what happens with that.

[Jonathan Tanwanteng:]

And then just the interest expense we should be modeling under the new credit premium?

[Sami Ahmad:]

Yes, I mean, interest expense, obviously, the rate increases are forecasted, so you should incorporate that. But then going forward, at our current pricing grid, you should expect a 50-basis-point reduction on the margin above the LIBOR rate. And in terms of debt, we have $19 million on the new revolver. We expect to probably -- down a little bit, so you should see some deleveraging as well.

[Jonathan Tanwanteng:]

And then finally just anticipating the byproduct market, where you expect it going to be relative to 90 and 100 days [indiscernible] ago?

[Simon Upfill-Brown:]

I didn't hear the question, I think you cut off on us, Jon. Sorry.

[Jonathan Tanwanteng:]

Anticipating the byproduct market and where you expected them to be maybe a quarter or 2 ago?

[Sami Ahmad:]

Which spreads?

[Jonathan Tanwanteng:]

Byproducts.

[Sami Ahmad:]

Oh, byproducts. Yes, so byproducts, yes, they were up -- what we had been saying -- products, Jon, is roughly $0.40 per gallon uplift that's currently -- are. Benzene was a little weaker, is a little weaker compared to earlier in the year. A lot of those components really tracked crude oil. But still we're holding around that $0.40 level.

[Operator:]

And we'll take the next question from Bill Dezellem with Tieton Capital.

[William Dezellem:]

The sound quality is so poor, I'm just going to take this all off line.

[Operator:]

And we'll take our next question from Greg Eisen with Singular Research.

[Greg Eisen:]

I apologize for asking a question you answered before, but I could not hear the answer. The question is, for the cost of sales this past quarter, are they permanently lost? Or are they just deferred? And will the customer catch up with you?

[Simon Upfill-Brown:]

Yes, Greg. The volumes will pick up in the second half, but we won't make up the lost volume as there are some other things that are going to bring additional volumes, like, we mentioned the PE guy who's starting up in the fourth quarter and the guy who started up last year, maybe, improving his operational efficiency and getting up to the 100%. So there are additional volumes that will come. But those 2 specific customers we spoke about, they will not make up their volume. They will certainly be better in the second half, we believe, than in the first half.

[Greg Eisen:]

I understand. And let me go on to -- let me ask another question and try to make it to the point so you can understand what I'm saying. You've made a lot of progress at AMAK. But are you any closer to answering the question of what is a tax-efficient structure for the company when you sell?

[Simon Upfill-Brown:]

We've been spending quite a bit of time on that. The complications on setting up separate entities and various other things where we might be able to avoid some of the Saudi tax really -- that we don't see the advantages of being able to do that.

[Sami Ahmad:]

Yes.

[Simon Upfill-Brown:]

And we have determined that Saudi tax paid on the sale would reduce our federal income -- federal capital gains tax on this sale. So we think that's probably the best we'll be able to do, Greg.

[Sami Ahmad:]

So for modeling purposes, Greg, I would just use the U.S. tax. Even though there is no tax treaty our advisers have -- that we would be able to -- foreign tax credit. And so I would just use the U.S. capital tax rate -- capital gains tax rate.

[Operator:]

And we'll take our final question from Tom Harenburg with Carl Hennig [ph].

[Unidentified Analyst:]

Simon, the prices earlier in the year hit a 10-year high. They've come down with the rest of the metal prices recently. But can you -- where you stand with the nickel operation?

[Simon Upfill-Brown:]

With the nickel operation?

[Unidentified Analyst:]

Yes, you've got that nickel lease over.

[Simon Upfill-Brown:]

We've got the nickel lease -- Tom, we haven't really [indiscernible] that. It turned out the full extent nickel there might not be worth doing. So we've been really focusing on the copper and zinc. And I think -- I don't know if you heard it in the call because of the lousy sound system, but prices are up. Even though they're down, they're high quite significantly. They're still significantly up on where they were when we shut the mine down in late 2015. So I think this is maybe one place tariffs have, maybe, impact us. But still metal prices are still on a relatively good, sound and the mine can generate very good cash at these prices.

[Unidentified Analyst:]

So if I understand you, then the nickel that you had is probably not going to be a factor going forward?

[Simon Upfill-Brown:]

I don't think so, Tom, no.

[Unidentified Analyst:]

And if memory serves me, the Saudi government, when you did some capital raising for AMAK, the Saudi governments were interested in a 20% position. And they were only allowed to buy a 10% position. Would the Saudi governments not be a potential buyer of Trecora's 34% interest in AMAK?

[Simon Upfill-Brown:]

Yes, I mean, the Arab Mining is, I think, what you're talking about, the company that's owned by different Middle Eastern states. That company remains, certainly, a potential buyer. They have been investing in a few other areas right now, and so it all depends on what's available to them. But they -- up to about 20%. I think it's either -- and a half or 20%. Because they participate in the investment in -- of 2016 when they bought almost 4 million additional shares, Tom. So they do own a roughly 20% share in AMAK. But you're right, they're certainly a potential acquirer.

[Unidentified Analyst:]

I missed a lot of that, you were cutting -- yes, maybe we can talk about it offline.

[Simon Upfill-Brown:]

Right, sure. Sorry about that. I really do apologize for the technical issues. Apparently the sound quality is better on the webcast than if you're on the -- system. And we don't understand. It's probably problems with the bridge or something. Even -- questions sometimes cut off. So sorry about this, and we would be happy to accept calls to answer questions that you might have individually. And I just wanted to thank you all for being on the call. We greatly appreciate your interest. We do support -- appreciate the support of our shareholders. Thank you very much for your continued support of the company. We'll be at the Jefferies Conference in New York City on August 7. And we'll be at the IDEAS Conference on August 29 in Chicago. Sami will be doing both of those. And as always, we extend an invitation for you to visit our sites. And when and if you do come, you'll be able to meet some of the new players we have on our Executive Team at Trecora Resources, and -- as I think you got from the call, we're very excited to have the team that we have now together. We're very optimistic that will be able to deliver very good return to all of you guys. Thank you so much.

[Operator:]

And this concludes today's call. You may now disconnect.