Trecora Resources
Q3 2016 Earnings Call Transcript

Published: 6 Nov 2016

[Operator:]

Good day everyone and welcome to the Trecora Resources Third Quarter 2016 Earnings Conference. Today's conference is being recorded. At this time, I’d like to turn the conference over to Mr. Matt Steinberg, The Piacente Group. Please go ahead, sir.

[Matt Steinberg:]

Thank you, Kelly, and good afternoon, everyone. Welcome to the Trecora Resources third quarter 2016 earnings conference call. The earnings release was distributed over the wire services after the close of financial markets earlier today. Our call today will include Simon Upfill-Brown, President and Chief Executive Officer; and Sami Ahmad, Chief Financial Officer and Connie Cook, Vice President of Accounting and Compliance. Following management's prepared remarks, there will be a question-and-answer session. Before we get started, I would like to review the Safe Harbor statement, which is found on slide two. Statements in this presentation are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management's beliefs and expectations only as of the date of this teleconference, November 3, 2016. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected. These risks, as well as others, are discussed in greater detail in Trecora's filings with the SEC, including the company's Annual Report on Form 10-K for the year ended December 31, 2015 and subsequent Quarterly Reports on Form 10-Q. This webcast is accompanied by a slide presentation that is available on the company's Web site, 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 Matt, and thanks to everyone joining the call this afternoon. I will begin today with a brief introduction of our newly appointed CFO, Sami Ahmad; then as shown on Slide 3, I will provide a brief discussion of the third quarter highlights. I will then pass the call over to Connie for a more detailed discussion of the financial results. Following that I will review progress at South Hampton Resources and Trecora Chemical. And conclude my prepared comments with an update on developments at AMAK before taking your questions. I'm very pleased to introduce Sami Ahmad, who is appointed Chief Financial Officer on October 1. Sami brings over 25 years of experience in various finance and accounting functions across a broad range of chemical, oil, gas and water service companies. Sami joins Trecora from Armada Water Assets, where he was CFO and served on the Board of Directors. Prior to joining Armada Water Assets in 2013, which he helped build from its formation, Sami served as CFO for Southwest Water Company and is Vice President and Treasurer for Exterran, a publicly-owned oil and gas services company. Prior to that Sami was with LyondellBasell Industries where he held a number of roles including Investor Relations, Treasury and Corporate Development. We are excited that Sami has joined the Trecora team as he provides depth to enhance our capabilities in IR, capital markets including debt management and M&A. The addition of Sami will also free up Connie to focus more on managing the company's financial reporting and compliance obligations, which have grown substantially in recent years. I would like to turn the call over to Sami to say a few words. Sami?

[Sami Ahmad:]

Thanks Simon, and good afternoon, everyone. I just completed by first month at Trecora and I would like to say I'm very happy to be joining the company's especially to point chemical industry particularly here in North America is poised for rapid growth. I've learned a tremendous amount about Trecora and our business during my first month with obviously much more to go. I'm very much enjoying working with Simon, Connie and rest of the Trecora team. I believe the company is on the right path to achieving our strategic objectives and maximizing shareholder value and look forward to making meaningful contributions towards these goals. Back to you, Simon.

[Simon Upfill-Brown:]

Thanks Sami and welcome aboard. Turning to the performance for the quarter, on Slide 4, we generated a sequential increase of 16% of prime product volumes in the third quarter. We also had several important customer accounts increase their volumes for the third quarter, which we expect will continue. This volume metric growth is partially offset by a continuation from second quarter of several customer specific factors that impacted sales volumes. Excluding the impact of these few customers' specific shortfalls, our third quarter prime sales are flat from the third quarter of 2015, despite a challenging overall petrochemical market. Importantly, we made significant progress on our capacity expansion initiatives in the third quarter to position ourselves for new growth opportunities in North America and Asia. Our fully diluted earnings per share were $0.03 compared with $0.21 in Q3 of 2015. On an adjusted basis our fully diluted earnings per share were $0.08 compared with $0.26 in Q3 of 2015 as both periods reflect equity in loses of AMAK of $2.1 million, which Connie will discuss in detail shortly. Moving to Slide 5, total revenue in the third quarter was $57.1 million, a decrease of about 15% compared to the year ago period, primarily because of the customer specific volume shortfalls just mentioned, but increased about 17% on a sequential basis because approximately 60% of our contracts are tied to the index cost of natural gasoline on a one-month lag basis, lower average selling prices also contributed to a decline in revenues on a year-over-year basis. As you can see on Slide 6, our feedstock prices in the quarter continued their upward trend from the second quarter and are now at levels similar to the third quarter of last year. However, feedstock prices were in a downward trend in the third quarter of last year, while this year, the slope is upward; this has a negative effect on margins on a relative basis. We continue to make progress on our capital projects during the quarter, these initiatives are expected to improve our capabilities and our overall profitability. We will cover our progress as well as other recent developments during the rest of the prepared remarks. Now, I will turn the call over to our Vice President of Accounting and Compliance, Connie Cook, who will review the financial results.

[Connie Cook:]

Thank you, Simon. Slide 7 present our income statement for the third quarter and first nine months of 2016. I will begin by discussing the quarter. As Simon mentioned third quarter revenue declined 14.6% year-over-year to $57.1 million compared with $66.9 million in the third quarter of 2015 that were higher sequentially by 17% compared with $48.9 million in the second quarter of 2016. The year-over-year decrease in revenue was a result of 16% decline in petrochemical sales volume to 20.7 million gallons when compared to 24.6 million gallons in the third quarter of 2015. The decline in revenue was partially offset by a 5% decrease in the average per gallon feed stock cost. Our average selling price was 4.3% lower in the third quarter of 2016 when compared to the third quarter of 2015. Foreign sales volume for the third quarter of 2016 was 5.3 million gallons versus 5.1 million gallons in the third quarter of 2015 and represents 25.7% of total petrochemical volume. These results include a 35.7% decline in volume shipments to our oil sands customers in the quarter. Petrochemical product sales were $47.3 million representing 82.7% of total revenue for the third quarter of 2016. Specialty wax sales were $4.9 million, an increase of 19.6% from the third quarter of 2015. We generated $5 million in processing fees during the quarter, about $3.7 million in the third quarter of 2015. The increase is a result of fees associated with the customer who reimbursed with us for installation expenses plus the mark-up. Third quarter deferred revenue was $5.4 million a sequential increase of approximately 0.9 million from the second quarter of 2016. As you will recall, the shipping costs for these sales are included in the quarter, so we cannot recognize the revenue until the shipment reaches its destination. Moving to the expense side of the equation, also as a reminder, we made certain reclassifications to the 2015 statements to confirm to the 2016 statements. These reclassifications did not affect net income as previously reported. Cost of sales including depreciation totaled $48.2 million a 5.2% decrease when compared to $50.9 million in the third quarter of 2015. Lower volumes for feed process and a decline in fee process from the third quarter of 2015 caused the decline. Gross margins for the quarter was 15.6% versus 24.0% in the third quarter of 2015, as a result of lower sales volume and average sales prices and a decrease in our feed margin on our byproduct sales. G&A costs were $4.6 million down 4% from $4.8 million in the third quarter of 2015. We saw decreases in the number of expenses including travel and officer compensation. Operating income was $4.1 million for the third quarter of 2016 versus the $11.1 million in the third quarter of 2015, a decrease of 62.7% and down from $5.9 million in the second quarter of 2016. We recorded equity and losses of AMAK of $2.1 million during the third quarter, which is essentially flat from the third quarter of 2015. Net income attributable to Trecora Resources was $0.7 million or $0.03 per diluted share, compared to net income of $5.3 million or $0.21 per diluted share in the third quarter of 2015. Adjusted net income for the quarter was $2.1 million or $0.08 per share. We estimate that our EPS is negatively impacted by $0.05 from the AMAK equity loss. Now, moving to year-to-date results revenues declined 12.8% year-over-year to $158.2 million when compared with $181.4 million in the first nine months of 2015. The lower revenue was a result of declines in petrochemical sales volume and per gallon feed stock cost, which translates into the lower average selling prices. Petrochemical volumes declined to $58.0 million from 62.3 million gallons in the first nine months of 2015. Foreign sales volumes were 13.2 million gallons versus 14.0 gallons in the first nine months of 2015. Oil sands volumes declined 16.8% during the first nine months of 2016. Petrochemical product sales were $129.1 million representing 81.6% of total revenue for the first nine months of 2016. Specialty wax sales were $14.6 million and we generated $14.5 million in processing fees. Positive sales including depreciation totaled $125.9 million, a decline of 7.2% compared with $135.7 million in the first nine months of 2015. The lower costs were a result of 14.8% reduction in feedstock prices. Year-to-date gross margin was 20.4% versus 25.2% in the first nine months of 2015. G&A costs were $15.5 million versus $14.9 million in the first nine months of 2015, an increase of 4.3%. The increase in G&A was primarily due to increases in health insurance premiums, directors' fees and consulting fees. We reported operating income of $16.2 million versus $30.3 million in the first nine months of 2015, a decrease of 46.6%. Increased operating expenses were primarily driven by higher freight cost, increased equipment rental and maintenance labor cost, mostly associated with A and C Train refurbishments. Depreciation on D Train and expenses associated with the [indiscernible] project which will reimburse. Net income from Trecora Resources was $20 million or $0.80 per diluted share compared to net income of $17.5 million or $0.69 per diluted share in the first nine months of 2015. Net income benefited from the bargain purchase gain on B plant of $11.5 million as well as equity in earnings in AMAK of $5.1 million or an estimated combined $0.43 per diluted share on an after tax basis. Adjusted net income for the first nine months of 2016 was $9.2 million or $0.37 per diluted share compared with an adjusted net income of $19 million or $0.75 per diluted share in the first nine months of 2015. Slide 8 shows the EBITDA and adjusted EBITDA calculations for the quarter. We reported third quarter EBITDA of $4.5 million which compares with $21.6 million for the second quarter of 2016 and $11.3 million in the third quarter of 2015. We call it, there was a bargain purchase gain of $11.5 million in equity and earnings of AMAK of $1.8 million reflected in the second quarter earnings. Adjusted EBITDA which excludes the equity and AMAK earnings or losses in share based compensation was $7.2 million for the third quarter of 2016 compared with $8.9 million in the second quarter of 2016 and $13.9 million in the third quarter of 2015. Adjusted EBITDA margin was 12.7% compared with 18.1% in the second quarter and 20.7% a year ago. EBITDA for the first nine months of 2016, which includes a bargain purchase gain on B plant of $11.5 million as well as equity and earnings of AMAK of $5.1 million was $40 million when compared with $34.6 million in the first nine of 2015. Adjusted EBITDA was $25.3 million compared with $38.7 million in the first nine months of 2015. Adjusted EBITDA margin was 16% compared with 21.4% a year ago. Slide 9 provides a brief summary of the positive and negative factors, we encountered during the third quarter that impacted our margins. As you can see, our profitability was positively impacted by lower feedstock cost per gallon year-over-year and increase in prime product volume sequentially and an increase in processing fees. However, these benefits were negatively impacted by lower product sales volume year-over-year an increase in lower margin byproduct volumes sequentially, higher feedstock cost per gallons sequentially, higher deferred sales sequentially and an increased maintenance and repair expense during the third quarter related to turnaround and installation expenses associated with the new processing unit. Slide 10 presents our balance sheet, as of September 30, 2016, cash was $7.6 million compared with $18.6 million at the close of 2015. If you recall, we drew $15 million on our term loan in December 2015, which caused us to have a greater amount of cash on hand than we normally would. Our total liquidity which is cash plus availability under our revolver was $42.6 million at September 30, 2016. Inventory was $18.4 million compared with $15.8 million at year end. We generally prefer to carry higher inventory during hurricane season. Long-term debt including the current portion that excluding loan fee was $79 million compared with $82.3 million at year end 2015. During the quarter, we drew $3 million on our line of credit for partial spending of capital projects. We made principal payment from both our acquisition and term debt of approximately $2.1 million. Capital expenditures for the quarter were $9.5 million. These included construction on the hydrogenation distillation unit project, the new advanced reformer unit and new cooling tower and various new improvements throughout those facilities. As many of you may know, we file an amendment S3 on October 11. Since we have not made the original S3 effective within nine months of filing; we will require to either file an amendment or withdraw the previous filings. We choose to amend. You will see another amendment to the same S3 within the next few weeks as we did not have Sami sign the first amendment because he just come on board, therefore, we will amendment for his signature. There are no current plans to use the S3. We had $32.2 million in working capital as of September 30, 2016 and ended the quarter with a current ratio of 2.4

[Simon Upfill-Brown:]

Thanks, Connie. Moving to Slide 11, for an update on South Hampton. Third quarter 2016, total petrochemical sales volume was 20.7 million gallons, a 21.6 sequential increase, although down 16% year-over-year. Prime product volumes were down 8.9% from 2015 levels. Excluding oil sand shipments, prime product volumes increased 16.7% sequentially and declined by only 4.3% year-over-year. Our major Canadian oil sands customer did not use much of their pentane inventory during the forest fires, which took place during the second quarter. Two maintenance turnarounds, one line in June and July and another in September further reduced demand. It appears that this customer is also improving the efficiency with which they use our pentane. In addition, to our Canadian oil sands customer, we continue to experience volume shortfalls with three customers which we discussed last quarter; namely, the Canadian Syncrude facility, which as most of you know is shutdown for the foreseeable future because of the January explosion. A customer in Latin America, preferentially using a local cost local supplier and the U.S. refiner that had a major maintenance around to improve long-term efficiency. In addition, it appears that this refinery is using a different crude which does not require as much use of our pentane. The further metals of the South Hampton business remains strong, apart from the four customers discussed here, the rest of our business remains very solid. Some customers have gone a little bit, but our number are up some significantly. On the year-to-date basis, we have delivered double-digit percent volume growth for four of our major customers compared to the prior year period, which we believe is a more reasonable representation of the demand environment in our markets. Quarterly byproduct volumes declined 33% from the third quarter of 2015, a good thing. But increased 44% sequentially, a bad thing. Byproduct prices were approximately $0.09 per gallon below our feedstock cost in this quarter, a decline of $0.21 per gallon from the second quarter of this year and a decline of $8.05 per gallon from the third quarter of 2015, clearly, this has a detrimental impact on our gross margins. Nevertheless, we were excited about the potential of our new advanced reformer unit to significantly increase the value of our byproducts. This project remains on track to ramp-up beginning in the second half of 2017. Third quarter deferred sales volume was 2 million gallons a sequential increase of nearly a $1 million or approximately 300,000 gallons. Petrochemical capacity utilization was 50% compared with 92% in the third quarter of 2015 and 45% in the second quarter of 2016. Capacity utilization was based on the 11,000 barrels per day of fresh feed in 2016 and 7000 barrels per day in 2015. International petrochemical volume increased to 25.7% of total volume from 20.7% a year ago. As we have previously mentioned, we supplied the initial [pool] [ph] material for the new PE polyethylene facility in the Middle East. We couldn't for the ongoing business that appears they might be using lower speck materials. We continued to pursue this business. We are now qualified as the Philippines front, which is now eager to use our product. We are working on ways to satisfy their requirement that we deliver product no more than 30 days after order. The Thai facility has delayed their trial of our product in mid-November, was originally scheduled for September. We are also optimistic about receiving initial pool orders from another polyethylene plant in Asia in the next month or two. Slide 12, presents a summary of our major improvement project at South Hampton. As we have discussed because our D Train has 6000 barrels per day of capacity, 50% more than we have planned for. We had time to perform extensive maintenance and refurbishment on A and C Trains. Although, this work added some expense in the short-term, the long-term benefits are significant. We are using A Train to extend our product line and have four new products in the works. I'm glad to say that we received in early September to ship in October and an initial two railcar order for the first product with more orders expected in the first quarter of 2017. We also have a customer trial in the second product continued to work on economically producing the third and have a fourth one that is in early computer simulation phase. We continue to anticipate that we will resume annual volume growth in the middle of next year supported by our capacity expansion and efficiency upgrades from D Train. The long-term industry view is quite promising. We are expecting new polyethylene plants in North America to add 8 million metric tons per year of manufacturing capacity, a 40% increase over current. A second Canadian oil sands customer is expected to come online in mid-2017 and we anticipate potential 60% to 70% increase in pentane volumes by 2021 about the 53 million gallon sold in 2015. As mentioned, the new advanced reformer unit will significantly enhance the value of our byproduct stream as well as provide a secure and reliable source of hydrogen for South Hampton’s high-purity pentane production and custom processing campaigns. We received a construction and operating permit from the Texas Commission on environmental quality only in the second quarter. And have started construction of the Aromax process unit. We anticipate this unit could provide an EBITDA gain of $12 million to $14 million per year once volumes ramp up. Slide 13, shows the progress being made on the new reformer unit. On right at the bottom, you can see the foundations for the basis of the multiple compressors. Behind the pipe rack, our foundations for reactors and heaters, just in front of the pipe rack is the stabilizing tower and the heater base for that tower, [indiscernible] is the new cooling tower that we installed as part of D Train. Moving to Slide 14, no doubt Trecora Chemical continues to disappoint, the setback after good indications of progress in the first half of this year. Wax margins are low and custom processing fees are down 11% versus the third quarter of 2015. Operating expenses are higher partially as a result of the ramp up in personnel and extensive training as we get ready to run the hydrogenation distillation project and additional business in B plant. There are some very positive signs, however, revenue increased at Trecora Chemical by approximately 8% compared with the third quarter of 2015 driven by higher volumes of wax sales, which was the second highest score in history trailing only the second quarter of this year. Third quarter especially wax revenues were up almost 20% year-over-year. We shut three new orders to customers in South America and received one local customer approval for our newest Fischer tropes substitute wax. We continued to work with the major customer to get our Fischer tropes substitute approved in their new formulations. Based on comparative studies by an independent laboratory, our waxes performed as well as and in some cases better than competitive products. While PVC lubricants initial trials using our powered CE wax was successful with one customer, who is planning on running a commercial trial in November, this month. We are encouraged by increased volumes of existing custom processing customers. At the same time, any improvement in revenue per hour driven generally by reduced cycle times and efficiency can be helpful. So far in 2016, our existing projects average revenue per hour is up 25% over 2015 levels. You do need to sell the additional time made available; however, we continue to make progress in this area. We successfully won three new contracts in the quarter and continued to see strong demand for our services. B plant is starting to ramp up and contributed revenues of approximately $215,000 in the quarter and is expected to add approximately $5 million per year in annual EBITDA during the 2017 to 2018 period. Construction of our hydrogenation and distillation project remain on schedule and is expected to come online in January of 2017. This unit will help us leverage existing relationships with our petrochemical customers and drive new custom processing revenue. Those expansion positions us to double custom processing revenues in 2017 compared with 2014 and potentially we deliver approximately $6 million to $8 million in incremental EBITDA per year. On Slide 15, you can see a side-by-side comparison of the progress made with our hydrogenation and distillation projects. Last time we spoke, we showed you the photograph on the left. All we had in was the rebar and preparation for pouring the foundations. Since that time the foundations were set. It took 55 trucks of concrete and the structural steel was erected over 230 tons of steel. The motor control sentries in the structure and if you look carefully you can see the new distillation tower in place. Great progress has been made. Turning now to an update on AMAK on Slide 16. AMAK was almost zero revenue in the quarter and as you would expect cost increased as the company get set-up for the eminent restart of the mine and the mill. Underground drilling has begun at Al Masane and the plan is to have a both copper and zinc reserve update by the third quarter of 2017. Underground oil production costs have started and the mill and flotation plant will start-up next month, with the ramp up in production over the next three to six months. Concerning the gold, mining license drilling is now more than 50% complete. It is good news to be intercepting gold mineralization at depths greater than 200 meters below the surface. The ancient miners never went below 30 meters. Gold extraction from the ancient dumps is in process. Turning to Slide 17, for a summary, during the third quarter, we achieved sequential growth in prime product volumes in SHR in the third quarter reflecting an increase in volume from several important customer accounts, which we expect will continue. And with the new projects ramping up in 2017, we expect to resume annual growth next year. We expect to accomplish this despite the continuation of volume shortfalls from some customers. The fundamentals of the SHR business are strong. At Trecora Chemical, we have the second best quarter ever for wax sales and are pleased to see continuing customer acceptance of our new products. The future of our custom processing is improving too as evidenced by winning several new custom processing contracts. We’re laying ground work for future growth at TC and during the quarter, we made significant investments in our capital projects and human resources to increase capacity, improve profitability and I’m sure we have the best trained employees for the job. At AMAK, we expect the mine to restart late in the fourth quarter of 2016 and anticipate it to prove economical at low metal prices in early 2017. Finally, we are investing approximately $100 million on the four projects listed on Slide 18. In anticipation of the significant chemical industry expansion that is expected to come online in the coming years. We already spend a total of $48 million on these projects, which includes the completion of D Train and acquisition of B plant. Based on our current view of the market, anticipated increase in pentane volumes and stronger operational efficiencies, we continue to believe that our capacity expansion has the potential to drive an additional $28 million to $36 million in annual EBITDA beginning in the 2018 to 2020 timeframe. These projects underscore our commitment to maximize our profitability and long-term shareholder value. This concludes my prepared remarks. At this time, I would like to ask the operator to open the call for Q&A. Thank you. [Operator Instructions] We will hear first today from Joseph Reagor, ROTH Capital Partners.

[Joseph Reagor:]

Thanks. I guess first, I would like to welcome Sami to the team, it’s good to have him on his first call and good to see Connie is with sticking everybody there too, I know she has got some plan to retire a little further off. But, good to see the team is growing and moving in the right direction.

[Simon Upfill-Brown:]

But, don’t ask Sami any question yet Joe.

[Sami Ahmad:]

Thank you for the kind words Joe.

[Joseph Reagor:]

Okay. So couple of kind of big picture questions here. I guess first wanted -- it sounds like all the projects are on schedule and on budget at this point. But, a lot of the forecast you guys have given on the -- from kind of a higher base line and now like for instance former byproduct pricing for those sales has dropped even further from the sounds of things. So, is there even more of a delta on the EBITDA side that we could see from some of these projects given that the baseline stopped a little bit? Or do you think that the margin that you get on is still roughly the same on a per gallon basis?

[Simon Upfill-Brown:]

It’s a good question, Joe. It’s hard to tell at this point. There might be a higher uplift a bit. We are busy looking through that right now. At this stage, I don’t think there will be much beyond on what we have been talking about. The roughly $0.45 or there about per gallon increase in the sales price for the byproducts.

[Joseph Reagor:]

Fair enough. And on the TC, hydrogenation and distillation units, you brought on more people that’s comfortably been impacting margins, is there more potential upside, if we are looking from today’s base line of a near breakeven EBITDA as compared to historically more like a $1 million to $2 million a quarter EBITDA level.

[Simon Upfill-Brown:]

Yes. Without giving you any guidance Joe, we missed quite a bit of custom processing revenue in the quarter. We fell below last year and as you heard me say any incremental custom processing revenue just about all of that flows to the bottom line, when you are in the sort of breakeven point. And so, when you lose custom processing revenue just about all of that revenue comes off the bottom line. So, just by a way of example, we were supposed to start-up a custom processing project in the middle of the quarter. But, our customer was unable to get the feed to us. So, you are standing by ready to run and then they have a glitch on their end and you lose that revenue. But, as you build your pipeline and you have more and more projects in the system you have less and less of that kind of impact. So, I think those kind of issues will start to clear-up.

[Joseph Reagor:]

Okay. And then, you mentioned the pricing lag -- input prices rose during the quarter and you had a lag on gaining some of the pricing back, if input pricing is like a flat line, what’s the magnitude of future pricing increases that you haven’t yet captured. So, I know you can’t give exact guidance on the price, but are we talking a couple of percent, or are we talking 10% kind of move?

[Simon Upfill-Brown:]

Well, on the contract pricing -- on the contract customers, it’s a fixed dollar amount about the about feedstock price. So, that varies as a percentage depending on what the feedstock price is. On the spot customer that’s a little bit more dependent on what our buddies at Philips are doing. There is a concern underway here to get spot prices up and some of those are starting to hold. And those are matters of low percentage numbers. But obviously, we try to get whatever we can.

[Joseph Reagor:]

Okay. Last one, on AMAK, with the gold asset. You mentioned you have done 30% of your drilling, do you know how much drilling they are doing like how many holes and how deep each hole is, and do you know if they are planning to publicly release the drill hole results of the assays or is the plan to just see if it’s worth making into a resource and make a decision from that basis?

[Simon Upfill-Brown:]

Well, if we do an IPO obviously, there will be a lot of release of information because the expectation is, it will automatically increase the value of that asset by declaring those numbers. I’m not sure how much we will be able to release on a go forward basis, Joe. If the drill hole -- the depth of varying, depending on where they are looking on the two major [banks] [ph] in this mining license. But, you saw that we did go down at least for the couple of holes below 200 meters because we found gold down there. So, the depths of varying depending on where they are looking and the more you drill the better the picture you build. And so the more accurately you can decide how deep you want to go. But, the other 50% of the way there now and I think last time we spoke, we were round about 35%. So, I think they are making very good progress there. And so, as we have said middle of next year, we will probably have all the information that we are going to get on that exploration program and we will share with you then whatever we can share with you. But, I would be very surprised if we didn’t share it just because it should be very exciting news.

[Joseph Reagor:]

Okay. All right. I will look forward to that. I will turn it over.

[Simon Upfill-Brown:]

Thanks Joe.

[Operator:]

We hear next from Sarkis Sherbetchyan with B. Riley & Company.

[Sarkis Sherbetchyan:]

Hi, everyone and welcome Sami. Thanks for taking my question here.

[Sami Ahmad:]

Thanks Sarkis.

[Sarkis Sherbetchyan:]

So, first, Simon maybe if you can help me understand just the dynamics right now. You are seeing real-time as far as the feedstock prices. Does it kind of continue to increase and rise on your end. And also, as you mentioned the formulae pricing scheme, I mean are you able to start passing that along to the customers?

[Simon Upfill-Brown:]

Yes. The way that formula pricing works is that, this month -- in the month of -- running November, in the month of November, we are pricing to our contract customers -- the average of the -- daily average of the October feedstock pricing. So, that’s why when you are in, in an increasing market that the lag negatively impacts you when you are in the declining market, the lag helps. To answer your other question, the last 10 days or so feedstock prices have actually been declining. They are down maybe 6% or 7% since two weeks ago and we have pretty good correlation between brent prices and our feedstock cost. I mean that’s a little bit lower now than it has been. Sometimes we are in sort of 100% correlation mode with brent. And we have been down as low as 50% or 60% correlation. So, it is a little bit all over the place. But, generally it’s not a bad rule of thumb that has brent prices change. So, our feedstock prices change roughly in the same ratio.

[Sarkis Sherbetchyan:]

I understood. And then, can you maybe touch upon why byproduct volumes were up almost 42% quarter-on-quarter, is there something underlying that’s kind of going on or are you guys working on something that’s related to the new product just a little bit of flavor there?

[Simon Upfill-Brown:]

Some of it was related to building some contain inventory, you saw that our inventory levels are up. And we tried to deal with that. As you well know pentane is our primary product. So, we did run quite a lot of additional pentane volume to build inventory. And as a result of that you sometimes have more exciting volume which we don’t sell. And that leads to additional byproduct volume. We also experienced a week or two weeks or so of very low pentanes in the feed. And when that happens you need to buy more feed to make the volume of pentane that you need to make. And so, that will create more byproduct as well because this other product in the feed that we are not looking for. So that’s generally what drives the additional byproducts. So, I think we will start working inventories down now that hurricane season is over and that will help us originally generate cash and as we build more confidence now in our D Train capability and D Train capability, going forward we might not have to build as much inventory during the hurricane season.

[Sarkis Sherbetchyan:]

Okay. Got it. And just kind of related to that, is this an anticipation of rather large order that would kind of come down here in the pipe or was it really just a secure the pentane volume and obviously with that comes the byproduct.

[Simon Upfill-Brown:]

In addition to the feedstock quality it was just to make sure we had -- we were okay in case the hurricane came our way. And when we have a reputation for reliability that we have, so at least, the worst thing you can do is not being able to supply customers when they need it. So, it’s sort of part of our hurricane preparedness plan has been to build inventory in case the whole plant goes down. And so, that’s -- it’s really -- it’s a customer reputation thing that that forces us to do.

[Sarkis Sherbetchyan:]

Okay. Understood. And then, I’m just looking at Slide 18 here the capital project versus the EBITDA projection. I know you did mention, I think it was four new products that are either in process or in testing or in design phase. Do the projections include potential revenues or profits from those products or would those be additional opportunities?

[Simon Upfill-Brown:]

That would be additional Sarkis. We don’t know enough about how well these products are going to work. I mean was one pretty good, right? We got our first order and we got more orders coming up early in the New Year. But, it’s too early to predict. I would be very surprised if they didn’t generate some fairly significant EBITDA in addition to what we are showing here.

[Sarkis Sherbetchyan:]

I will hop back in. Thank you.

[Simon Upfill-Brown:]

Thank you, Sarkis.

[Operator:]

We will hear now from Bill Dezellem with Tieton Capital Management.

[Bill Dezellem:]

Simon, would you actually just expand on that last comment where you have these products that could lead to a significant EBITDA above and beyond which you would be sharing with us?

[Simon Upfill-Brown:]

Yes. What can I say, the one that we have -- our first order on Bill, I had to be careful here without sending all kinds of flashing signals to our competitors. So, if I’m a little bit of choose, it’s for that reason, I’m not trying to hide anything from you guys. The one product that we are -- that we got the first order from and we have the follow-up order coming early next year, is a very, very high margin product, it’s a very high-purity product. One that we haven’t made in the past, it appears there is really only one other global supplier who makes this kind of purity. And so, what I’m saying is, we should be able to make very, very solid gross margins of that project with almost very limited just energy as incremental costs. So, there is raw materials aren’t cheap but because they are different to what we normally use, but the margins are so good at it. So, it’s -- the other ones it’s just way too early to say what we can do with them. The one as I mentioned was pulled in the sort of the computer simulation phase. The other one was still in the process of finding a way to make. And the second one which we trialed the customer -- there is sort of in development phase of how they will use that product. They are expecting it to ramp up fairly solidly, but it’s still early days for them. But these are all sort of logic or extensions for us that should add to the value of our business.

[Bill Dezellem:]

And Simon, I think just a couple of questions on that front. The high-purity product only made up one other company, that you had ever made before is, when do you expect meaningful revenue from that product?

[Simon Upfill-Brown:]

I would say if all goes well, we should get fairly significant revenue from that during next year.

[Bill Dezellem:]

I think you want to be more specific what part of next year?

[Simon Upfill-Brown:]

You're bullying me Bill.

[Bill Dezellem:]

Just down to the week would be okay, week one through 52.

[Simon Upfill-Brown:]

Well, we should give them revenue from -- in the first quarter; it gets on this quarter, we should get some revenue from it in the second quarter and then that should be quarterly after that, if all goes well.

[Bill Dezellem:]

Okay. That’s helpful. And also, I would like to go with this is, your additional capacity, is that what's leading to your ability to bring out this product and others or is there some new level of technical expertise that is leading to this?

[Simon Upfill-Brown:]

Well, we’ve been thinking about new product for some time. I mean even before I came here there was an effort at introducing new products, what the extra D Train capacity does for us is that it allows us to use A Train to do the processing development work to prove that we can these products at scale, which we never really had before. So, that’s really why we’ve upped the emphasis on these new products because without the multiple towers, you haven't been to visit us yet, but you would see that in A Train there is multiple distillation towers, and we can use them in various sort of configurations to do this development work. And so without us being able to supply our full permitted volumes of pentanes with just A and D -- just C and D Train, we would have to be using A Train to make pentanes. So that’s how we are able to do this.

[Bill Dezellem:]

Excellent. That is helpful. And feedstock cost in the fourth quarter to-date, how do they compare to the third quarter average?

[Simon Upfill-Brown:]

Did you hear that, I mean, I think its early days we had the final numbers for third quarter and our fourth quarter just starting out. As I have said earlier in the last 10 days or so, feedstock costs have come down.

[Connie Cook:]

In the final process now.

[Simon Upfill-Brown:]

Yes. Right. Yes, so, it looks like --

[Connie Cook:]

In the final three contracts that we have right now.

[Simon Upfill-Brown:]

Okay.

[Connie Cook:]

And the two.

[Simon Upfill-Brown:]

Okay. There are -- yes, because the first product was less than -- October numbers were really high. So, yes, we need some more time to really belt on to that question. I mean more shipments from our supplier.

[Bill Dezellem:]

Right. Okay. Thank you. And then, relative to I think the comment you made on the call is, middle of next year that's when you expect to see this overall volumes begin to grow again, is that correct?

[Simon Upfill-Brown:]

Yes. While there is two polyethylene projects that start-up -- that use our stuff, that start-up in 2017, one fairly early in the year, one towards the end of the year. And then, the large volume is mid-2017 from the additional Canadian oil sands mine that starts up middle of the year. So that’s when we are expecting additional volumes to come from the new projects.

[Operator:]

We will hear from Singular Research, we will go next to Greg Eisen.

[Greg Eisen:]

Thanks. Good afternoon Simon and Connie. Welcome aboard Sami. Following up on Bill’s question about Q4 pricing so far. Just really you don’t have an exact number, but is it correct go, should we be correct in assuming that October prices were continuing up from the third quarter’s prices?

[Simon Upfill-Brown:]

Yes, yes.

[Greg Eisen:]

Okay. And I heard your comment about just recently what’s happened --

[Simon Upfill-Brown:]

Yes, we were down a little bit. Everything depends on what happens with our OPEC, this week there was a huge build to crude inventories, it’s like 15 million barrels of crude -- build of crude inventories in the Wednesday report. And I think that’s the biggest ever build crude inventories. So, in the EIA report, so I think we will have to see how that goes -- going forward and whether the OPEC can persuade the Iranians and the Russians and everybody else to join in and having a production.

[Greg Eisen:]

Okay. Next question the new products that we have been talking about that you are experimenting with -- are they had all dependent on assuming that they actually work and demand is there and you could deliver them. Are they all depending upon you completing the capital projects that you have on -- you outlined on Slide 18? Are those projects necessary in order to actually produce these new products?

[Simon Upfill-Brown:]

No. We were really -- with D Train up and running and --

[Operator:]

Askeladden Capital Management.

[Simon Upfill-Brown:]

What happened? Hello? I think he is cut. Greg was in the middle of his question. Kelly?

[Operator:]

Greg, your line is open.

[Simon Upfill-Brown:]

Greg, are you there?

[Greg Eisen:]

I’m there. Can you hear me?

[Simon Upfill-Brown:]

Yes. Sorry about that.

[Greg Eisen:]

Okay. No problem. So your answer is the new products are not at all depending upon the completion of the capital spending that you have in place right now and I understand that.

[Simon Upfill-Brown:]

D Train is complete and A Train is being upgraded and refurbished and we did the big magnets turnaround and it's A Train that we are using to produce these products.

[Greg Eisen:]

Okay. You mentioned about the byproducts that one of the U.S. based customers has -- I think you said they have seen -- I think it was for the byproducts that a U.S. based -- maybe it’s still on volumes -- they did it back on volumes for just the primary product. The U.S. customer has performed some maintenance and now post their maintenance they -- you don't think they will require as much of your pentane previously. Is this something that’s just a one-off peculiarity to that customer or is there technology out there that can kind of permanently stair step down the demand for pentane for all your customers?

[Simon Upfill-Brown:]

We don't supply a lot of these to refineries for this particular application. We have two and this is just one of them. The other customer is actually increasing volumes with us. I think I mentioned in the prepared remarks this customer is not only that appears to improve their efficiency, but they have also changed their crude slate and it's that that might be driving the lower demand than the actual efficiency on their system. So we will wait and see how that goes if they change that they might well -- the volumes might well increase again.

[Greg Eisen:]

Okay. So it isn't a -- this isn't necessarily a unique creation of technology that can permanently reduce anyone’s demand?

[Simon Upfill-Brown:]

No. I don’t think that’s the case.

[Greg Eisen:]

Okay. Okay. And I guess let’s someone go after this question, on the byproducts I realize you are going to be able to with reformer -- you are going to be able to produce byproducts that have a higher market price. And therefore, allow you to capture more value out of what you are generating out of byproducts after producing your primary product. But, if you look at the byproducts that you will be selling in the future and the prices that they have historically sold at. Have they ever sold at prices that have been low enough that even after the advanced reformers in place, you could still in a down cycle lose money on those byproducts?

[Simon Upfill-Brown:]

I would never say never, Greg. But, I think it’s highly unlikely, I mean we were justifying this project we went back a long time in history on the value of the products we will be making. And we use conservative numbers, so I would be very, very surprised if we were -- once that reformer starts up, we still be selling about byproducts at negative feed margin, I think that’s a very, very, very unlikely situation.

[Greg Eisen:]

Understood.

[Simon Upfill-Brown:]

I think will be in good shape.

[Greg Eisen:]

I’m just thinking about what’s the kind of the worst case scenario of pricing there and these [indiscernible]?

[Simon Upfill-Brown:]

Yes. I think so.

[Greg Eisen:]

Yes. Barring Armageddon is not going to happen. Got it. Okay. I [see no] [ph] scope. Thanks.

[Simon Upfill-Brown:]

Thanks Greg.

[Operator:]

And we will now hear from Samir Patel, Askeladden Capital Management.

[Samir Patel:]

Hi, Simon. I think -- it’s a first question, just real, real quick, can you give me an update on how much CapEx is what to spend between -- not today, but between the end of the quarter and Q2 2017, when you have all these capital projects done?

[Simon Upfill-Brown:]

It’s about -- we have $98 million on the list and we have spent $48 million, so it's about $50 million.

[Samir Patel:]

Okay. Got it. Second question is, you historically guided kind of $8 million called maintenance CapEx budget for your plant health and maintenance repair and such. Given that your product need so how much new capital into both South Hampton and Trecora Chemical, is there $8 million or would you be expecting kind of post Q2 2017, and we should be bumped up a little bit for new equipment or how are you thinking about that?

[Simon Upfill-Brown:]

I certainly don't think so for the first four, five years after this equipment is installed, I mean this is all long lifetime equipment, so I think that’s a 6 to 8 number that we have been using. I think is pretty better, Samir.

[Samir Patel:]

Okay. And it would step out in the out years, up a little bit maybe?

[Simon Upfill-Brown:]

Yes. Maybe obviously hopefully not but six years from now they will not be -- there might be some more maintenance beyond what we’ve currently been doing plant health capital, but I don’t think so.

[Samir Patel:]

Sure, okay. And again, this is the final question on that. Look after Q2 2017, if I do the right math, you will have about $120 million in debt, you have spent $170 million on CapEx over these past three, four years, if you add them kind of $70 million expense required A Plant, it's now called Trecora Chemical. If hopefully if all these projects go well, you’re going to be generating a material amount of free cash flows, I mean starting in Q2 2017 going forward what’s your priority for that, you want to put it into more projects, do you want to delever, do you want to just kind of look for acquisitions, can you just help me think about what you do with that cash flow?

[Simon Upfill-Brown:]

I think we got all of the above I think, right. I mean I think -- we haven't -- we don’t has yet have a company dividend policy and we never paid one. That might be something we can do, we have a number of potential acquisitions. We don’t exactly have a great track record as yet on -- our number one acquisition. I’m very comfortable we will be satisfied with the TC acquisition going forward. But, up to now it hasn’t been very successful. And we are hardly convinced that a bad acquisition is a 100 times worse than no acquisition at all. So we are very convinced if we do, do further acquisitions, we will do a little bit more due diligence, that will do a lot more analysis than perhaps we did on TC. Nevertheless, I think there are some opportunities there, I mean we do -- we are not very highly leveraged, right? I mean, I think, I don’t think there is any real need to be paying down debt. If we can get something out of AMAK, that presents potentially even more cash for us to be thinking about what to do with, I mean I look forward to that problem. But, I think there are a whole of options, its return to shareholders, it’s invest more, it’s paid down debt and all those things that you can possibly do with it.

[Samir Patel:]

Sure. And I guess, a final question on AMAK, obviously, you guys would like to monetize at some point. On the flip side, if for whatever reason, it kind of keeps dragging out. Is there any appetite of more capital into the mine, or you just kind of -- if it’s going to raise more capital it can be from the other shareholder of the mine?

[Simon Upfill-Brown:]

Yes. You know, we didn’t participate in the one in -- just as recently in July. We would delete it down a little bit as a result. I don’t think we have an appetite to put more in there. The view is that they have an up cash with -- they did just investment by out of mining company was basically a sort of a security blanket. The view was there was enough cash in the company to get through the start-up and finish all this exploration that’s going on. But, this was just in case ramp up was slower, all those things that might go wrong, right? Because the mine has been down for over a year now, or will be by the time they start up. So, I think, it is certainly appear there is sufficient cash in the business in order to get things running and finish this exploration and put the whole package together to do this IPO in early 2018. But, we will keep you guys updated on that front. I mean ultimately I think we have said a number of times we would like to be out of the mine.

[Samir Patel:]

Sure, right. And to that -- sorry, one final question, which is -- one of the previous caller referenced Armageddon, so in the sort of Armageddon like scenario that I don’t know a meteor just falls out of the sky and hits the mine, beyond that $40 million loan guarantee that you guys have to that, do you have other outstanding liability to that or is there any capital calls, and basically are there any scenarios where that actually pulls cash from Trecora?

[Simon Upfill-Brown:]

No. That would be -- there is no way, we would have to do any of that. On the loan guarantee, the [SIVS] [ph] has never used that loan guarantee thing in all the projects that they have done. And some of them have not been very good. So…

[Samir Patel:]

Okay. Thanks. That’s all for me.

[Simon Upfill-Brown:]

Thanks Samir. Yes. So, one more question. One more question please.

[Operator:]

Yes. We do have time for one more question. That will be from Nick Toor with Luzich Partners.

[Colin Lee:]

Hi, it’s Colin on behalf of Nick. How are you doing Simon?

[Simon Upfill-Brown:]

Hey, Colin. How are you?

[Colin Lee:]

Good. Quick question, I guess on the international petrochemical volume besides Canada which is your second largest country of volume destination?

[Simon Upfill-Brown:]

I don’t think we will disclose that Collin. And we have to be careful once again for competitive reasons. I don’t think we have disclosed that ever.

[Colin Lee:]

Got you. And then, U.S. refinery changing their crude feedstock slate, did they go heavier crude, or did they go lighter?

[Simon Upfill-Brown:]

I think they went lighter.

[Colin Lee:]

Okay.

[Simon Upfill-Brown:]

Because what they use material to do is to -- is a little bit like the Canadian oil sands. They use it to remove heavies.

[Colin Lee:]

Got you. I guess we have done some research on a couple of infrastructure project down there and it seems that more Louisiana or refineries interested in getting Canadian heavy as -- heavy from other places become scarce, is that a trend you can benefit from?

[Simon Upfill-Brown:]

Well, I think so for the reason that it’s a very convoluted reason, I’m not sure it will be proven to be true. But, the way the Canadian product comes down here, if it comes by pipeline, it is diluted. It is diluted with natural gasoline, which is our feedstock. So, as more and more feedstock comes down here, I think there is a likelihood that there will be more natural gasoline available in those region. They are finding more natural gasoline up in Canada, which means they are taking less from this part of the world. I mean that is purely a theory, Colin. But, I think it might help us with feedstock supply and maybe potential prices.

[Colin Lee:]

Got you. And when is that heavy Canadian crude arrives rail, I guess, you guys don’t benefit from that?

[Simon Upfill-Brown:]

It depends. It depends if they use unheated railcars, it then does have [delivered] [ph] in it. If it comes in a heated railcar they don’t use the [delivered] [ph] because they can just keep it molten.

[Colin Lee:]

Got you. I guess my next question is, on the custom processing projects on Slide 14, you say six successful proposals resulting in three new contracts during the quarter. Does that mean there are three more potential contracts or does that means the remaining three went to competitors or customers internal plan?

[Simon Upfill-Brown:]

I think it’s all of the above. I think we might well be getting one or two of those coming forward in the future and the other ones maybe the customers change their mind or whatever. But, we made the proposal and the customer like it, but whether the project is still alive, I’m not 100% sure. But, my expectation is, you should at least get one or two of them.

[Colin Lee:]

Got you. And on the wax business, how many customers is Trecora Chemical, I guess through the evaluation stage and is end kind of the customers preferred supplier group, so that from here on out, it’s just orders?

[Simon Upfill-Brown:]

That’s a good question. I don’t think I don’t have that data at my finger tips, okay? I will see if we can get that to you Colin.

[Colin Lee:]

Got you. I think that would be helpful. Great. Thank you.

[Simon Upfill-Brown:]

Thank you. Thank you all once again for joining us today. If you have further questions, I know we ran out of time here. But, if you have further questions, I think you know how to contact us. And we will do our best to respond to you promptly. And have a very good evening. And thanks once again for being here.

[Operator:]

And again, that will conclude today’s conference. Thank you all for joining us.