Trecora Resources
Q3 2014 Earnings Call Transcript

Published: 31 Oct 2014

[Operator:]

Good day, everyone. Welcome to the Trecora Resources Third Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jeff Fowlds with Genesis Select. Please go ahead, sir.

[Jeffery Fowlds:]

Thank you, operator. Good afternoon, everyone. Welcome to the Trecora Resources Third Quarter 2014 Earnings Call. The earnings release was distributed over the wire services approximately 30 minutes ago and should be available on most of the financial websites. Our call today will include Nick Carter, President and Chief Executive Officer; Connie Cook, Chief Financial Officer; Simon Upfill-Brown, President of South Hampton Resources; and the newest member, Peter Loggenberg, President of SSI Chusei. Following management's prepared comments, there'll be a formal Q&A session open to all participants on this call. Before we get started today, I'm going to review the Safe Harbor statements, which is Slide 2 in the presentation. 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 upon management's belief as well as assumptions made by and information currently available to management. Because such statements are based upon expectations as to future economic performance and are not statements of fact, actual results may differ from those projected. These risks, as well as others, are discussed in greater detail in Trecora's filings with the Securities and Exchange Commission, including Trecora's annual reports on Form 10-K for the year ended December 31, 2013, and the company's subsequent quarterly reports on Form 10-Q. But as a reminder, this webcast is accompanied by a slide presentation that is accessible on the Trecora Resources' website at www.trecora.com. [Operator Instructions] Now I'll turn the call over to the President and CEO of Trecora, Nick Carter, for his comments. Nick?

[Nicholas N. Carter:]

Thank you, Jeff. I'd like to thank all of you who have joined us for the Trecora Resources conference call. I'd like to remind you that the financial results discussed in this call will include only the traditional Trecora Resources entities, including South Hampton Resources and AMAK. On all subsequent calls, we will be including Chusei, which will soon be renamed Trecora Chemical, in our discussion of quarterly results. Though our financials for the quarter may not have included Chusei. Much of our time in the third quarter was spent on the acquisition, and I'd like to thank all of those who spent time and effort to make the transaction work. Now moving to Slide 3, which is the index. Let's start a review of the third quarter. I'll provide a high-level look at our business, then Connie Cook will follow with more detailed discussion of the financial results. Simon Upfill-Brown will discuss South Hampton Resources' operational updates, including an update of our D-Train progress. We'll then offer a brief introduction of Dr. Peter Loggenberg. Peter will provide a brief review of the Chusei business model and activities. I will then conclude with an operational update on AMAK mining activity. And finally, we'll have a brief summarization of the program. As you can see on Slide 4, our third quarter revenues increased 26.4% driven by 27.4% increase in volume. During the first month of the third quarter, we continue to receive orders resulting from the Force Majeure declared by our competitor, which added incremental demand to an already strong quarter. Also, our oil sands customer continue to require shipments above contracted volumes, and other international sales remained strong. International volume makes up 27.9% of total volume and continues on an upward trend from the 23.9% in 2013. As we mentioned last quarter, we signed 3 new clients in Asia-Pacific, which added to the international growth. Also, as volumes continue to demonstrate steady growth, margins during the quarter continued to remain solid. Our third quarter was another record quarter for many of our financial metrics

[Connie J. Cook:]

Thank you, Nick. Slide 7 presents the income statement for the third quarter of 2014. Quarterly revenues increased 26.4% to $76.9 million compared to revenue of $60.9 million for the same period a year ago. The increase in revenue was due to an increase in volume and processing fees. Volume of petrochemical sales increased 27.4% due to increased incremental demand, resulting from 3 events

[Simon Upfill-Brown:]

Thank you, Connie. As Nick and Connie suggested earlier, we had another very strong quarter in our petrochemical business. On Slide 9, we can look at additional detail on South Hampton sales volumes for the quarter. Prime product volumes at 5.5 million gallons per month, hit a record and we're up 22% from the third quarter of 2013 and up 4% from the second quarter of 2014. Deferred sales were 2.4 million gallons, up slightly from the 2.3 million gallons in the second quarter of 2014, but as Connie mentioned, up 35% versus the third quarter of 2013. Combined byproduct, excess product sales volume at less than 20% of total remained net-relatively flat versus the second quarter of 2014, helping us drive our gross margins to record levels. We continue to believe that it will be unlikely we'll be able to push byproduct volumes below 20% of total petrochemical volumes given our current feedstock and technology. As far as excess product is concerned, we define excess product as prime products that we are forced to sell at dramatically discounted prices. We are finding some success in minimizing the production of these volumes. As we have mentioned in the last few quarterly updates. The improved volume trends continue to be aided by our recent efforts to debottleneck the plant. Capacity utilization for the third quarter was 87% based on 6,700 barrels of feed per day versus 71% in the third quarter last year and 84% in the second quarter 2014. Improved asset utilization should allow us to increase our revenue levels, if necessary, from existing capacity for the balance of 2014 and into early 2015. International sales volumes continued well and represented 31.1% of total revenues for the first 9 months of 2014, up from 26.2% for the full year of 2013. If we turn now to Slide 10. International sales volume continue to be driven by the Canadian oil sands, where demand for our products remained strong, and we expect Phase 2 orders from our customer there in the early part of 2014 -- 2015, giving us another leg of growth. As we mentioned last quarter, we received orders from our first 3 customers in the Asia-Pacific region and our agent there continues to develop these accounts along with many others. At domestic pentane market share levels of 75%, we do not expect further dramatic local growth apart from general economic improvement before the next polyethylene capacity comes onstream in 2016 and beyond. Latest capital investment estimates for the U.S. chemical industry have reached $120 billion over the next 10 years. This bodes well for both South Hampton pentane-hexane business and the custom chemical manufacturing side. Our D-Train expansion, as many of you know, adds approximately 4,000 barrels per day of feedstock capacity to the approximately 7,000 barrels that we have today. Though our official scheduled completion date is the end of 2015, we will install capacity in tranches to meet any incremental demand we may see in early mid 2015. You can see on Slide 11 some of the recent strides we have made in moving D-Train forward. Piping and pipe racks, heaters and columns on site put us for additional pipe rack, et cetera. We are very pleased with the progress the team is making. Many of you heard me say on these calls that no acquisition is better than a bad acquisition. I am very pleased that we found Chusei. It fits many of our defined criteria and has significant upside potential. In other words, a great acquisition. I would now like to hand the call back to Nick to introduce the CEO of that business. Nick?

[Nicholas N. Carter:]

Thank you, Simon. And I want to introduce the newest member of our team, Dr. Peter Loggenberg has been in the chemical industry for many years, both with larger companies such as Sasol and with small privately help companies such SSI Chusei. As President of the newest part of Trecora Resources, he brings the distinguished list of academic achievements but also and importantly, strong practical and operational experiences. He's been the President of Chusei for the past 5 years and helped guide it to the position of value it is in today. We are very pleased that he's agreed to remain with the company and look forward to working with him to build and grow our petrochemical business. Peter?

[Peter Matthews Loggenberg:]

Thank you, Nick. Firstly, let me say how excited I am to be part of the Trecora organization. I'm pleased to join this exceptional and experienced team and look forward to developing and growing Trecora Chemical. All the Chusei employees are positive about the change and are very impressed by what they have seen thus far. As for business model, the new Trecora Chemical has 2 major high-margin business segments, which are shown in Slide 12

[Nicholas N. Carter:]

Thank you, Peter, and welcome aboard. Let's turn to AMAK on Slide 14. Mining sector, as a whole, has been depressed for most of 2014, and AMAK has experienced similar results. As we discussed last quarter, we decided to take steps to improve our operations, and we're pleased with the recent hires that were made at AMAK. The new management is putting in place the proper growth initiatives, cost controls, and planned efficiencies to build the business going forward. However, we continue to experience disappointing results in the third quarter as the earnings impacted Trecora with a loss of $343,000. For the first 9 months, ore tons processed were down only 1.3% versus budget. However, shipments in total were up 13.4%, with copper down 16.3% and zinc up 10.9% versus budget. The weakness in copper pricing in the quarter continued, and the outlook going forward remains volatile. The outlook for zinc pricing is bullish on all fronts. The outlook for performance going forward could show very real improvement. But frankly, our expectations for the remainder of the year and next will be flat and reserved. There are a number of good things happening such as the activation of the precious metals circuit during this quarter and in fact, it's taking place as we speak. We're looking at improved metal recoveries. We've already seen a 5% improvement in the recovery of zinc, for instance. We really cannot improve the ore blending efficiencies and chemical controls are being put into place. We renegotiated the contract with the Chinese company that's supplying the labor for the mill operation, which should help reduce cost, but more importantly, will align the contractor's interest with our own interest. All of these changes can individually and collectively improve the economics of the project, but we are cautiously optimistic as everything seems to move slowly in the kingdom. Also of note, a positive coming down the pipe is a lot of initial development costs, which has been amortized quarterly, will roll out off the books in the coming years. And that's going to help the bottom line. There are lot of things happening which are positive, and we're confident that ultimately, the project will be in solid condition. Just to reinforce the current plan, we continue to project 2014 concentrate on each to be in 31,500 wet metric tons of copper concentrate and 38,000 wet metric tons of zinc concentrate, and that was 700,000 metric tons of ore processed. Slide 15 shows what our 2015 projections are for AMAK production. Notice that the zinc production is projected to rise to 47,000 wet metric tons due to the ore mix that we will be delivering to the mill. This is fortuitous as the prices for zinc are projected to be on the rise for the next several years. There are a couple of world-scale zinc mines which will be shutting down in the next year or so, and the market is anticipating tightness in the market going forward. There is no news to report on the application for additional leases, and our Saudi partners don't view the extended timing of this as anything to be concerned about. We would like to have these lease finalized prior to the IPO, and that IPO is now being targeted for late 2016. For a summary, let's go to Slide 16. We are very happy with the results of the third quarter and, particularly, that it continue to trend at strong performance. The record volumes and revenues and near-capacity utilization support the decision to expand the process and invest further into this niche business that we operate. The investment into an expansion of the U.S. chemical sector bodes well for our business going forward to 2016 and beyond. Our own South Hampton expansion will give us 60% more capacity and should keep our marketing department busy for the next several years. The broader footprint in the industry which we achieved with the recent acquisition can do nothing, but add opportunity. Chusei brings a whole new list of possibilities to the mix. On the AMAK mining side, we've made the right moves to position that venture for a positive IPO coming down the line. We intend to continue to support the development of the venture and are confident we can see a monetization of the asset at the appropriate time. As a reminder, we will be filing 8-K with the pro forma statements for the Chusei acquisition within the 71-day period as required, which will take some time in early December. And if we can get the information together and file it early, we will be doing so. So keep your eye open for that. This concludes my prepared remarks. And at this time, I'd like to open the call for questions. Operator, can you please open the call for questions?

[Operator:]

[Operator Instructions] And we'll take our first question from Sarkis Sherbetchyan with B. Riley and Company.

[Sarkis Sherbetchyan:]

Welcome, Peter.

[Peter Matthews Loggenberg:]

Thank you.

[Sarkis Sherbetchyan:]

So just to start off, on the specialty solvent side of the business, can you talk a little bit about the volume trends and what you're seeing real time here in Q4?

[Simon Upfill-Brown:]

Hi, Sarkis. Well, we don't give guidance, right? I mean, we do see -- historically as you will note that fourth quarter and first quarter are generally a little bit slower than the second and third quarters. But our Canadian oil sands customers is running the setup. The issue there is railcar availability. We do have some railcars coming -- more railcars coming into our fleet, and the customers are helping us find railcars. But that's, so that was a question that might limit our ability to supply them everything that they need. But yes, I mean, things look good. But you remember the seasonality that we generally experience.

[Sarkis Sherbetchyan:]

Yes, that's helpful. And relative to the business that you're holding onto, it looks like from the competitor situation, is that still a business piece that you're able to hold onto? Or has that kind of subsided?

[Simon Upfill-Brown:]

No. I mean, it seems like 3 or 4 customers are speaking with us with additional volumes. So that's exciting.

[Sarkis Sherbetchyan:]

That's helpful. And then on the pricing side, do you see anything from the pricing dynamics? I know you mentioned the situation with what's going on in crude. How does that impacts your go-forward pricing mechanism?

[Simon Upfill-Brown:]

I think we've said in the past that we have about roughly 50% of our business thereabouts is based on fixed at or over an index. And as that index comes down, obviously the price falls too. But in fact in percentage terms the margin goes up. But the actual price drops with the cost of the feedstock. But as Nick mentioned as, our pricing is based on prior month price, why are these prices are falling and actually helps us improve the margin a little bit. And then the rest of the business, we try to hold up as long as we can but we're on -- the spot prices we try and keep those up as best we can. And some signs of our competitor dropping those a little bit. But we hold onto that as best we can.

[Sarkis Sherbetchyan:]

Okay. And that actually helps me transition into a margin question. I mean, looks like you guys came in well ahead of what we were expecting. Is this kind of a nice level to fold margins for your business on the specialty side, kind of given the pricing dynamics and the volume and utilization rate?

[Simon Upfill-Brown:]

Yes. I think so. I mean, a lot depends on the competitive situation, right? But it looks fairly reasonable construction.

[Sarkis Sherbetchyan:]

Okay. That's helpful. And then I think, Connie, you mentioned CapEx number for the quarter was that $4.5 million?

[Nicholas N. Carter:]

Yes, I believe it was.

[Connie J. Cook:]

It was $4.5 million, yes, for the third quarter.

[Sarkis Sherbetchyan:]

Okay. As far as CapEx is concerned in ore, given that you guys are bringing it looks like the first tranche of the D-Train online, is there some kind of more material investment anticipated in Q4?

[Connie J. Cook:]

Well -- go ahead.

[Simon Upfill-Brown:]

Sorry, go ahead, Connie. Go ahead, Connie.

[Connie J. Cook:]

Well, I was just going to say, yes, those expenditures are still occurring for D-Train. So it will be higher than normal because we're still acquiring equipment for the D-Train expansion.

[Simon Upfill-Brown:]

Remember our total capital estimate, which is still holding, was about $30 million. And the larger item pieces of equipment, longer lead time item pieces of equipment, those are starting to come in now. And as they do, obviously, we have to show it as a capital expenditure.

[Sarkis Sherbetchyan:]

Yes. No, that's helpful. I'm just trying to get a better handle on how to model that piece going forward. And then, if we kind of step back and look at your acquisition, it closed in the beginning of this month. So will you have a full quarter's worth of results the next time you report?

[Simon Upfill-Brown:]

Yes.

[Connie J. Cook:]

Yes.

[Sarkis Sherbetchyan:]

Okay. And I know you guys had released an 8-K of the standalone business. So is it reasonable to attempt the fold that business going forward in your outlook? And if so, is it possible to provide us with any kind of benchmark or flavor for what the business looks like whether there's seasonality or not. Just kind of to help us understand how to model the business.

[Simon Upfill-Brown:]

I mean, it's a difficult one to answer as we learn more about the business. Obviously, Peter knows quite a lot about it. But we're trying to train him not to give guidance, Sarkis. So...

[Connie J. Cook:]

In the amended 8-K that we filed, we will have pro formas in there for 6/30/13, 12/31/13 and 6/30/14, which will essentially show the 2 businesses combined. For the 10-K, at the end of the year, we will have that 1 quarter that we actually own the business.

[Sarkis Sherbetchyan:]

Okay. And when you report results the next quarter, that press release would also include the business.

[Connie J. Cook:]

It will include the quarter, the fourth quarter.

[Operator:]

And our next question will come from Joseph Reagor of Roth Capital Partners.

[Joseph G. Reagor:]

So just have a few questions. One of them was following on something previous guy touched on. You guys had these issues with the competitor that allowed you to pick up, I guess, it was about 1 million gallons last quarter and you said you expected some of that to rollover into this quarter. Can you quantify what it was in the third quarter?

[Nicholas N. Carter:]

How much of the customers we retained, is that what you're asking?

[Joseph G. Reagor:]

Yes. Of that bump you got in Q2, like what rolled into Q3? And then also on that note, what might roll into Q4?

[Nicholas N. Carter:]

Simon, I haven't looked at that number. Do you...

[Simon Upfill-Brown:]

Yes, I'm not sure that we have it -- I have it right off the bat. Joe, we'll have to get it for you.

[Joseph G. Reagor:]

Okay. That's fine. An e-mail is fine on that. Moving on, also I think Q4 tends to be a seasonally down versus Q3 from you guys -- for you guys at South Hampton. Are you guys expecting that again this year? Or do you think that just general demand growth can help to compensate for that?

[Nicholas N. Carter:]

It will be down a little bit. I don't think that you'll see a decrease like it has in years past. That oil sands has increased our volumes so much that I think it'll be, probably, take some of that seasonal dip out of it. There will always be a seasonal dip because the polyethylene, guys, just don't use as much in cool weather as what they use in hot weather. And so some of that's largely going to be there. But I think the dip is going to be, percentage-wise, less than what we've seen in the past.

[Joseph G. Reagor:]

Okay. Would it be fair to say it will be less than, say, 2 million gallons?

[Nicholas N. Carter:]

I don't know that we can give a number like that.

[Joseph G. Reagor:]

Okay. Fair enough. All right. Moving over to the mine. You guys now have a history for the 2 years up until Q2 on the website for great tonnage recovery rates, et cetera. Will you guys be providing that in your Qs going forward on a quarterly basis?

[Nicholas N. Carter:]

I don't think that we will be plugging stuff back in the Q. But I think that we will be trying to make some press releases and things like that posted on the website. And things, I'm not sure if it's appropriate to put in a Q, but we do intend to try to make that kind of information public. And so if you watch it forward, we will try to get it out there on a timely basis.

[Operator:]

And our next question will come from Tom Harenburg of Carl M. Hennig, Incorporated.

[Thomas Harenburg:]

Nick, did I hear you right that the IPO is now scheduled for late '16?

[Nicholas N. Carter:]

Yes. With the operating problems that we've had, [indiscernible] and the changeover at management and things like that, the CEO and the executive committee have really determined with some of the improvements that need to be done, that really very most effective for the IPO, we need some time to get these things in operation. And so we decided that it would be better to push it off rather than try to force it and really not be ready for it because obviously, when we do it, we want to put our best foot forward on this IPO. And we really don't think we're ready to do that because of all these changes that we got coming down the line. So that's why it's been put off some.

[Thomas Harenburg:]

Okay. I understand. Will you...

[Nicholas N. Carter:]

Let me just add that Simon and I spent a week in London with the CEO and the CFO last week. And we went over the operation and what the progress is and, of course, what the punch list is of the things -- many things we need to accomplish to really get ready for the IPO. And he's got a good handle on what needs to be done, but just getting this list of things accomplished is going to take some time. And I feel like he has got a good handle on the project, but we need to get the correct time to accomplish what needs to be happen. So...

[Thomas Harenburg:]

Okay. Would it be a safe assumption then that, that AMAK will not contribute -- will continue to contribute losses in the fourth quarter?

[Nicholas N. Carter:]

I cannot say if it's going to be the loss. But in my scripted remarks we've pretty well laid out all of the positive things that they're getting started. And I would optimistically like to say that during 2015, they'll start contributing on the positive side. But on the other hand, I can't swear about that just because it takes long -- it seems to take a long time to get things rolling over in Saudi Arabia. And so we're just kind of cautiously optimistic that we'll see some pretty current improvements. Precious metal circuit is, in fact, as we speak, they're working on a startup of that thing. And that potentially could be a big economic boost. And we got these other things that he is working on that control with all over blend and the talc circuit thing is going to produce a better quality and he has got recoveries are up 5% already. And there's just any number of things that you're doing, all of which are going to improve. But we just have to wait and see. It's a tough business. These are not great times. The prices are kind of -- copper is pretty weak, and that's the big money. And zinc is getting better, but it's slowly getting better. It's not really jumping up in price. And so it's just going to take some time, and we're going to have to be patient with the proposal.

[Thomas Harenburg:]

Okay. Flipping over to the new Trecora Chemical, do you expect that they will contribute to profitability in the fourth quarter?

[Nicholas N. Carter:]

That's why we bought them. Yes. Well, obviously, the first quarter, we've got some things we're trying to get sorted out and get the connections made and get the coordination made and all that kind of stuff. And so the fourth quarter is kind of hard to predict. But going forward, we've got every confidence that, yes, this can be positive contributor. And we think that it just opens up a whole realm of opportunities for both companies really. So, yes, we're pleased about it, looking forward to working with them.

[Operator:]

And our next question will come from John Curti of Singular Research.

[John H. Curti:]

A question for Simon. You went by pretty quickly on the utilization rates on -- based on 6,700 barrels a day. Could you go over those once again, please?

[Simon Upfill-Brown:]

Yes, sure. We were at -- make sure I get it straight, we were at 87% in the third quarter, John, up from 71% in the third quarter of last year and 84% in the second quarter. And we think we can squeeze out a little bit more than 6,700 barrels a day. We can probably get that up to 7,000 or maybe a little bit more. And then of course, Phase 1, I'm not sure we have an exact number yet. But Phase 1 of the D-Train will be coming up at the end of the first quarter we'll able to get a hold of more through.

[John H. Curti:]

With respect to Trecora Chemical, I noticed that raining through the year, the financial statements for them that they have 2 large customers, one was apparently an affiliate of Chusei in some form or fashion or affiliated companies, there was about 25% of revenue, and the second customer about 12%. With respect to the Chusei-affiliated business, do you have any contracts in place that will continue that business? Or is that business at risk of going elsewhere? Or if it does, do you have additional customers that you can step up and fill that with?

[Simon Upfill-Brown:]

No, we do have a contact in place with them to continue moving forward. We're adjusting a few things which allow us a little bit more flexibility to go off the business directly. And so yes, I mean I think, we're on pretty solid ground there, John. We have a little bit more flexibility, and they will continue to take product from us.

[John H. Curti:]

With the strong increase in the Canadian oil sands customer, I think you said somewhere it was referenced up 220%. Were there some other customers that had previously been very strong that are maybe taking less volumes now of any significance?

[Simon Upfill-Brown:]

Not of any significance. There are a few -- one of our Middle East customers is down a little bit, a couple of others are maybe a little bit down. But it's not -- I don't think we've lost share in any of those places. We just have these springs and roundabouts issues that occur all the time, right? Some guys are up a bit and some are down a bit. So there has been -- they have been a few customers that have taken less product from us, but I don't think any of it's really significant, John.

[John H. Curti:]

And then the 3 customers that you had previously referenced in Asia-Pacific region, could you give us a bit of an update as to what's going on there in terms of trials and volumes?

[Simon Upfill-Brown:]

Yes, I think the 3 are still pretty much in the trial mode. we can't claim anyone of those as being fully fledged long-term customers but they are -- all signs are extremely positive. I think we've said a number of times that it takes a long time for these things to actually happen because they're cautious about making a switch. But obviously, when they do, you generally have the business for a long time. So this is -- it's not a bad thing that they do take a long time. We just have to be patient.

[John H. Curti:]

And with respect to maybe garnering additional tar sands business, with the price of oil coming down pretty sharply here, hopefully it stabilizes. Based on what you've seen, what types of prices will you need to see from oil for them -- for new projects to continue to be developed and not delayed?

[Simon Upfill-Brown:]

Yes. I don't think we have an exact number. Obviously, the guys who are committed, like the customer we refer to who is starting up Phase 2 next year and really a long way down on their Phase 3, that's going to happen. It's the guys who haven't turned the shovel into the soil yet, that might delay if things go low. John, I don't think I can say I have an exact number. You hear them saying below 80 gets a bit tougher for tar sands. But I don't really have a good number for you. It's something we're going to have to monitor very carefully. But the existing business and the guys who've already broken ground, they -- they're going to just have to go ahead.

[John H. Curti:]

And then for Connie, if you could give me the volume split between domestic and international and the dollar split domestic and international.

[Connie J. Cook:]

International for the year was 17 million gallons and the total volume...

[John H. Curti:]

The quarter?

[Connie J. Cook:]

You want just the quarter?

[John H. Curti:]

Yes, for the quarter.

[Connie J. Cook:]

Just the quarter was 5.7 million.

[John H. Curti:]

International?

[Connie J. Cook:]

International. And then the sales for the quarter was 21.6 million.

[John H. Curti:]

And the international volumes were up how much?

[Connie J. Cook:]

Well, they were running at 27.9% of total sales volume.

[John H. Curti:]

Nick, with respect to the -- to AMAK, how many shipments were made in the third quarter and what is anticipated in the fourth?

[Nicholas N. Carter:]

2 and 2, which is pretty much on track with their normal production. And if you noticed, I did question the guys last week about the total tons of ore that they expected to process, and they confirmed that the -- they're still shooting for the budgeted amount of 700,000 metric tons of ore processed, that's still a valid figure.

[John H. Curti:]

And still be down somewhere in terms of shipments though, for the year down, 12% to 15%? likely?

[Nicholas N. Carter:]

The tons is still targeted to be -- both the budgeted amount is that they're down slightly. I think they're trying to make up some of that with the increased recoveries, but they've had some reliability issues. So I don't know if they're taking to build make that much ground. So yes, I would expect, without being able to positively give you an answer, that they're going to have a hard time making up that shortage that they had it at the end of the third quarter.

[John H. Curti:]

You mentioned that there will be some development costs rolling off, I guess, at the end of this year.

[Nicholas N. Carter:]

Yes, I think there was quite a bit that was amortized over a 5-year period. And I think that 5-year period will be rolling off at the end of the year. And I really don't have a number for you right this minute. We'll try to get that and see if we can get that into the public confirmation.

[John H. Curti:]

And then with the new contract with the company that provides the labor and runs the mill, a significant amount of savings there and I'm assuming that there's going to be some sort of incentive or profit sharing there for them to continue to work on lowering costs including recovery?

[Nicholas N. Carter:]

Yes. There is some incentives built into the contract. The -- if you look at the price per ton, I think that the number is about $2.5 million savings over the previous contract. And labor cost over the year, that's an annual -- no, that's -- let me think. I don't want to say that wrong. That maybe a 2-year -- no, that's 3-year, that's about 4 over 2 years, I think. But anyway, there is some significant savings in labor cost, but on the other hand, there is some incentives built in and it has to do with recoveries, it has to do with maintaining equipment, it has to do with just performance metrics like that.

[John H. Curti:]

Once you start reporting the former Chusei results, will they be broken out as a separate segment or will all their numbers just kind of get lumped in with the existing operation?

[Nicholas N. Carter:]

I think we don't have think about that. I don't know on a regular reporting basis that we're going to necessarily report every individual plant separately. I think that we'll have to discuss that and decide the best way to go with it.

[John H. Curti:]

Because a good chunk of their business would be kind of, like your custom processing, right?

[Nicholas N. Carter:]

Yes. Yes, we break that custom processing right now, and we may end up with, like chemicals or petrochemicals and then custom processing being broken out. But I'm not sure how we're going to separate the 2 where it's our own products or they probably need to be discussed.

[John H. Curti:]

Well, I'm assuming, because of the size of it, for SEC purposes, it's not mandated?

[Nicholas N. Carter:]

Right. And the other thing, we need to be careful about South Hampton has always been a pretty transparent. We have always tried to be as transparent as we could with their information. But the fact of the business that Chusei has got, you've got more competitors and you've got more proprietary information involved with their custom processing and that type of thing. And I'm not sure that we're going to be able to maintain the same transparency with them that maybe you're used to seeing with South Hampton. It's a little bit different ball game there, and we'll have to be careful with that.

[John H. Curti:]

In terms of -- and this is maybe for Peter. In terms of the split between the 2 businesses, the specialty wax business, there you have considerable excess capacity there, correct?

[Peter Matthews Loggenberg:]

We do have some excess capacity available, yes.

[John H. Curti:]

All right. And do you feel now that you're part of Trecora that you'll be in a position to maybe be a little more aggressive and going after market share and getting some share from people?

[Peter Matthews Loggenberg:]

We believe that we'll be able to go after some additional market share because we're improving the quality of our product and also expanding our capability to make some different product range. So other than that, I can't really say much more.

[Nicholas N. Carter:]

The other thing, John, is that we think that probably our marketing capabilities will help them maybe get into some areas where potentially they're not into right now. And we think that with the improved quality that they're starting to produce that there are some opportunities, and our marketing guys are out there every day. If they can knock on the right door and just kind of get the ball rolling where we can help them potentially spread to market.

[Operator:]

And our next question will come from Jim Gentrup of Val Vista Capital Management.

[Jim Gentrup:]

Well, I just wanted to ask a couple of quick questions about the D-Train. I think you said was going to be completed at the end of Q1. So how should we look at -- especially Q1, about just your capacity and if you have more demand coming in if you can handle it, what do you...

[Simon Upfill-Brown:]

Yes, I mean it won't be fully completed, Jim. It's just the first phase. We're adding a total of about 4,000 barrels a day of feed, which will be all-in by the end of 2015. But for Phase 1, we are estimating at least another 1,000 barrels a day by the end of the first quarter.

[Jim Gentrup:]

Okay. But I'm not sure that answers my question. I'm just kind of asking if your Q1 and if you get more demand coming in, how do you handle it, I guess.

[Simon Upfill-Brown:]

Well, I mean, we have very good handle, hopefully, on what to expect in terms of volume and that 1,000 barrels -- that's why we're -- Phase 1 is roughly 1,000 barrels so that we can handle all the potential additional volumes that we might get.

[Jim Gentrup:]

Okay. All right. Okay. And then I heard you talk about the delayed sales in Q4 -- or going into Q4. Can you just repeat that? And also, how does that compare with a year ago and maybe also sequentially, whatever you can -- data you can give me?

[Simon Upfill-Brown:]

Yes, sure. I mean, the -- in volume terms, the deferred sales were up only slightly from the second quarter of 2014, from 2.4 million gallons, up from 2.3 million gallons. But they were up 35.2% over the third quarter of 2013. So quite a significant increase on a...

[Jim Gentrup:]

On a year-over-year basis?

[Simon Upfill-Brown:]

Yes, right.

[Jim Gentrup:]

Okay. And then the -- I think you mentioned you had some acquisition costs from Chusei, I believe, in this past quarter. But you didn't really tell us kind of then what your pro forma would've been. Or did you -- or maybe I missed that? Did you quantify what EPS would have been without those onetime costs?

[Nicholas N. Carter:]

Connie, do you know what that number is?

[Connie J. Cook:]

No. I mean, we don't try to come up with EPS. I can tell you probably about -- there's probably about $400,000 worth of expenses that were related to the acquisition that are in the G&A cost, but we don't carry it down the EPS, you would have to tax effect it and all...

[Jim Gentrup:]

Sure. I just thought it would be -- I thought it would be a useful number because it would give us your true -- well, I mean including AMAK, I guess but...

[Connie J. Cook:]

Right. And it is somewhere around $400,000.

[Jim Gentrup:]

All right. Just my $0.02. And then the last question, you may have already addressed this, but it sound like you said the feedstock prices are falling going into the Q4 here. So I would assume then we probably would see a little better gross margin than we did last year, Q4?

[Nicholas N. Carter:]

Typically, that's been our pattern just because we are -- formulas are set up with the trailing 30-day average price. As the prices fall, your product prices are trailing by about 30 days. And so you typically would see increased cash flow during the fall. And once it gets kind of the stable, which is over last week or 10 days, it's kind of flattened out or it will go off. But during the fall itself, you would see increased margins. And add to that, it comes flat out but...

[Jim Gentrup:]

And would your customers...

[Nicholas N. Carter:]

When the price goes up, of course, it goes the other way, it squeezes your margin as it moves, but that's a typical pattern.

[Jim Gentrup:]

I understand. You probably can -- I mean, just talk about your -- quickly, your customer relationships and your contracts. So wouldn't they be looking at this information to and trying to get you to -- bring the prices down or do you -- is that already baked into a contract?

[Nicholas N. Carter:]

If the feedstock prices stay down, yes, I'm sure that selling prices will come on down. At this point, the industry was used to some variations, and they don't react too much until it looks like they're kind of in a stable place because they know that it can move back up just as quick as it fell down. And so you don't -- generally speaking, you don't see product prices moving. It's not like street gasoline or something like that. These are manufacturing materials and prices just don't move as quickly as what you might see on the street with gasoline and stuff like that. So yes, ultimately, the prices would change. It's just -- it hasn't happened to hit them.

[Jim Gentrup:]

Okay. And then just 1 quick question on AMAK. It's probably -- you probably can't answer it, but I mean, is the breakeven point with AMAK, is it more of a function of getting the operations to more efficient, which I know you're already -- you started on that road? Or is it more of a function of the volatile pricing that's going on with the -- in the copper and -- especially copper? But I mean, which one is it more weighted to or is it equally weighted, if you could just comment.

[Nicholas N. Carter:]

Well, we think that right now with the pricing there's out there, if it were -- if it stays within the range it's at right now, the thing should be breaking even or doing better if it's operated correctly. And that's what the CEO's responsibility is focusing on as he's trying to fix the things he can't control. Obviously you can't control market price, but he can control costs and efficiency and stuff like that. And that's where he's focusing his time.

[Jim Gentrup:]

And can you give us some idea of when he would be able to complete that?

[Nicholas N. Carter:]

Well, it's going to be a process. And like I said, we're kind of cautiously optimistic. There's a lot of things that could affect economics pretty quickly, right? Is that a precious metal circuit jumps up, starts running as it should fairly quickly, we'll -- we could see some improvement pretty quick. But on the other hand, if it doesn't run correctly right away and we have to work on it and tune it up and mess with it, learn how to run it and all that kind of stuff, it might take 6 months. And true with some of these other things, the recovery is just kind of a thing that you learn over time, how to improve those and some of the other improvements or -- ore blending control that he's trying to establish has worked to make that routine operation. So we're optimistic that he's doing all the right things, but just the timing is very difficult to predict.

[Operator:]

And our next question comes from Colin Lee of Luzich Partners.

[Colin Lee:]

Simon, did I hear you right that Q4 capacity is going to be 7,000 barrels per day?

[Simon Upfill-Brown:]

Yes. We think we might be able to squeeze that out, Colin.

[Colin Lee:]

Got you. And for Asia, the 3 potential customers, are they the same 3 customers that were mentioned in the previous earnings call?

[Simon Upfill-Brown:]

Yes.

[Colin Lee:]

Got you. So good progress there?

[Simon Upfill-Brown:]

Yes.

[Colin Lee:]

And then for your towing business, any updates on potential customer?

[Simon Upfill-Brown:]

We continue to work very closely on a couple of those, Colin. We haven't signed anybody up yet, but things looking pretty good. I mean, I think we've said a number of times, these take a long time because they require the customer to commit to long-term arrangement with us, at least in South Hampton. This is one of the advantages of Chusei is because they have multipurpose equipment, you can get projects in very quickly. But for us, we have to assemble the assets and it's only with the customer doing that if they commit to 5 years or 10 years or something like that. So they do take a long time, but we keep plugging away on those and hopefully, we'll have good news one of these days.

[Colin Lee:]

On that note, I guess after you have Chusei, I mean a lot of potential customers are going to see the multipurpose equipment, no long-term commitment. Why would they want to go ahead with the long-term arrangement?

[Simon Upfill-Brown:]

I mean, one of the reasons is just that the Chusei guys have very flexible equipment, but they can't do everything. And some of these projects, if they did it at Chusei, it would consume all the capacity. And we're not prepared to do that. So it's just that we have the different model and the best way forward is in some cases this has to come here and in some cases, it's better to go there. There might even be a project we're doing here that might be a better fit in Chusei, existing project. So we're considering all those potential options. But the 2 big projects that we're working on for custom chemical manufacturing at South Hampton would not fit at Chusei.

[Operator:]

[Operator Instructions] We'll take our next question from George Gasper [ph].

[Unknown Analyst:]

First of all, I have a question. Nick, on this improved AMAK's recovery referred to in your formal comments and [indiscernible] and answer the questions. Is there a target date on precious metal getting started here and making the contribution?

[Nicholas N. Carter:]

Yes. they're commissioning the unit and doing some trial runs right now. I got an email this morning or yesterday that they're underway on trying to get that thing started. When it would start contributing kind of depends on what kind of success they have getting started. So I can't comment on that.

[Unknown Analyst:]

Okay. But it's possible that by the end of the year, going into...

[Nicholas N. Carter:]

I would hope so, yes.

[Unknown Analyst:]

Okay. All right. And then on the -- Simon, on the throughput on the chemical on the South Hampton side, I think Connie mentioned about 87% of the quarter. What was the exit rate on the throughput at the end of September relative to 87%? Can you highlight that at all?

[Simon Upfill-Brown:]

What do you mean by the exit rate there, George?

[Unknown Analyst:]

The capacity you're running at September 30 relative to the 87% which is the average to checking further.

[Simon Upfill-Brown:]

Oh, okay. We were a little bit higher in September. Connie, I can't remember, maybe a little bit higher in September. But the average for the quarter was 87%. And that's based on 6,700 barrels a day. And I think as we said a couple of times is that we think we can squeeze with existing kit, at least 7,000 barrels out and then early next quarter, we'll have another 1,000 barrels.

[Unknown Analyst:]

All right. Okay. Okay, that's good. And then in an overview question on the investment at South Hampton's putting forward by the end of, your target, beginning the end of next year. And what -- post the acquisition of Chusei and what you're going to be adding to the capital program there, improvement program, what are we talking about in the total number between the 2 additions, post the part of the consideration of the value of Chusei brings in, in terms of your investment by the end of next year?

[Nicholas N. Carter:]

Well, the South Hampton expansion, as we've said, is $30 million in total. And that would take from now to early end of next year to actually fund that. The Chusei, the project that's being considered and we're studying expansion of their custom processing capability, that's been identified at about $18 million. That's also about a year-long project that would be finished by the end of 2015. So between the 2, you're looking at about $48 million between the 2.

[Simon Upfill-Brown:]

Some of D-Train, we would have spent maybe $10 million of D-Train by the end of the year, by the end of this year.

[Unknown Analyst:]

I got you. Okay. And then on the relative basis, compared to the investment that you had at the end of the quarter between the 2 operations, Connie, is there a number that the investment represents at this point at the end of the quarter in terms of plant and equipment? And just trying to analyze what the total increase that your -- that we heard now just on the comments, what that would be in terms of percent of increase.

[Connie J. Cook:]

Are you talking about just asset wise, like on the balance sheet?

[Unknown Analyst:]

Asset wise. Yes.

[Connie J. Cook:]

Well, we paid approximately $73 million for Chusei. So that will come in on their asset side. Our balance sheet currently shows $158 million in assets. So those -- they're half of what we are, essentially.

[Unknown Analyst:]

Okay. The $158 million it doesn't include the acquisition?

[Connie J. Cook:]

Right. It doesn't.

[Unknown Analyst:]

I wanted to make sure I got that right.

[Connie J. Cook:]

That's right. We closed October 1. So there's nothing in these financials that shows Chusei.

[Unknown Analyst:]

Okay. So if you now fit those together, we're talking about $230 million of investments and then putting approximately $48 million in so it's about a 20% increase, relatively speaking, just looking for a target range of what you're adding to the representation of the asset base.

[Operator:]

And our final question will come from Sam Namiri of Grand Slam Asset Management.

[Sam Namiri:]

I'll keep short, I know it's been running late. Just a quick question on the mine. I know that it's showing -- not showing GAAP profitability, but in terms of cash flow, what is that looking like?

[Nicholas N. Carter:]

Cash flow is okay. They're paying the bills. It's probably going to be pretty tight this year. But it's not the situation where we're going to have to do any capital calls or anything like that. The tightness mostly has to do with some of the work that they're trying to do to get the thing more efficient. And -- but they are paying their own bills, and we expect them to maintain that throughout the year, according to the budget. So it's okay.

[Sam Namiri:]

Okay. And then another question how it was about Trecora Chemicals. In terms of -- you're talking about the quality of their chemicals showing improvement recently. Is that similar to your South Hampton business where it's like the purity is better than others in the marketplace?

[Nicholas N. Carter:]

Well, the markets that they can get into with the higher quality material expanded over the lesser quality and of course, you get a better price for it.

[Operator:]

And it does appear there are no further questions at this time. I'll turn the conference back over to our speakers for any additional or closing comments.

[Nicholas N. Carter:]

Yes. I'd like to close by thanking all of our employees for the hard work that produces these good results that we had this quarter. As I said earlier, the company's success is truly a team effort. And we try to operate that way every day. We appreciate the people that work for us. We do appreciate all the interested parties that have participation on this call today. And we know your time is valuable and hope that you'll join us for the next call and you'll track our progress in between here and there. We also hope that you'll see the value in our stock and will continue to follow our progress and invest with us. So thank you for participating.

[Operator:]

And that does conclude today's teleconference. Thank you all for your participation.