Earnings Call Transcript - GURE Q2 2023

Operator, Operator

Greetings. Welcome to the Gulf Resources Second Quarter 2023 Earnings Conference. Please note, this conference is being recorded. I will now turn the conference over to your host, Helen Xu. You may begin.

Helen Xu, IR Director & CEO

Thank you, operator. Good morning, ladies and gentlemen and good evening to all those joining us from China and the U.S. I would like to welcome all of you to Gulf Resources' second quarter 2023 Conference Call. I'm Helen Xu, the IR Director and CEO of the company; Mr. Xiaobin Liu will also join this call today. I'd like to remind all our listeners that during this call, certain management statements will contain forward-looking information about Gulf Resources and its subsidiary businesses and products within the rules of the Securities Act of 1933 and the Securities Exchange Act of 1934, and are subject to the Safe Harbor created by those rules. Actual results may differ from those discussed today, taking into account various risk factors, including but not limited to general economic and business conditions in the PRC, the risks associated with the COVID-19 pandemic, future product development and production capabilities, shipments to customers, market acceptance of new and existing products, competition from existing and new players in the bromine and other oilfield and power production chemicals, changing technology, and the ability to develop future bromine assets. Gulf Resources assumes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Accordingly, our company believes the expectations reflected in those forward-looking statements are reasonable, but there can be no assurance that such will prove to be correct. In addition, any reference to the company's future performance represents the management's estimates as of today, August 14, 2023. For those of you unable to listen to the entire call at this time, a replay will be available on the company's website, and the call will also be accessible through links provided in our earlier press release. Now, we will review the results of this quarter first. I'd like to turn the call back to Mr. Liu for his comments. Let's first look at the Chinese economy for this quarter. The Chinese economy continues to severely slow down, and our products were especially impacted. The demand for bromine was weak, significantly controlled by COVID-19 effects. The demand for automotive parts, particularly, declined, especially since many companies had built up stock anticipating higher sales, not the slowdown in construction impacting target sales. As a result, bromine prices, as reported by sources, which had been RMB 69,500 per tonne on October 16, 2021, drastically dropped to RMB 18,000 on June 30, 2023, reflecting a decline of approximately 4 percent. However, the company expects that bromine prices may improve in the future. In fact, by August 10, 2023, bromine prices had increased to RMB 24,200. Nonetheless, it is difficult to estimate the exact timing of this improvement. Additionally, the decline of the RMB against the U.S. dollar could present a significant benefit for our company, as a lower RMB makes chemicals using bromine more expensive. This means that domestic producers should gain market share in pharmaceuticals and other chemicals that may be cheaper for export. Given the pricing of bromine in the second quarter, the company believes that most companies in the bromine industry and those producing chemicals made from bromine have not been profitable. While we have yet to witness significant bankruptcies, we assume many may arise, given the current market conditions. We are confident that our company currently maintains a strong cash position and balance sheet. Accordingly, we have made two decisions to protect capital and plan for future operations. We have sought current approval to close our bromine factory. Reopening these factories may require the company to build new infrastructure and drill new wells. This is the current status of developments in the bromine market. We have sufficient capacity and are not looking to expend additional capital until we see stronger results in the market. We expect to receive permission to re-open these factories but understand there is no sense in spending capital until they can operate profitably. As previously announced, we have postponed the delivery of the remaining equipment for our chemical factories while we evaluate market opportunities. We are committed to our Chemical business and believe it will be profitable over the long term. However, different products will require slightly different final equipment. For example, some products that are more polluting may require more complex solutions for processing. During this period, when most chemical companies are facing low demand, we are conducting a thorough review of the potential market to ensure that we are tailoring the most appropriate equipment. Once the review is finalized and the market stabilizes, we will finalize our equipment delivery and assembly, then proceed with pilot testing production. Now, let's discuss the financial results. Due to the weakness of the Chinese economy and a significant decline in bromine prices, the company reported an after-tax loss of approximately $61,800 for the second quarter and approximately $1.2 million for the six months ended June 30, 2023. However, during this six-month period, we generated cash from operations of around $11 million. These figures reflect the inherent strength of our business model. At the end of the second quarter, our balance sheet remained strong. We have approximately $150 million in cash, equating to around $11.05 per share. Our net cash, which is cash minus all liabilities, amounts to approximately $97 million, or $9.32 per share, while working capital stands at approximately $112.6 million, or $10.79 per share. Shareholder equity is approximately $260 million, representing about $24.95 per share. We are pleased to report these results while generating strong free cash flow and bolstering our balance sheet. As for our future goals and objectives, we anticipate that the economy, in general, and the bromine market, in particular, will improve. As of August 8, market prices had increased by 34 percent since the end of the second quarter and 11 percent from the average selling price during that quarter. Revenue for the second quarter was approximately $7.4 million. If bromine prices had averaged 11 percent higher during the quarter, our revenues would have reached approximately $8.2 million. This would have provided us with additional gross profit of approximately $809,000 for the quarter. Our loss before taxes was approximately $874,500, indicating that a price increase of just over 11 percent could have led us to breakeven. As of August 14, market prices for bromine demonstrate a requirement for an increase of 37 percent since the end of the second quarter and an 8 percent increase from the average of the second quarter. This could yield additional profit based on our previous projections. Therefore, when bromine prices improve further, we will pursue obtaining approval for our company's remaining operations within the bromine sector. We are maintaining focus on our Yuxin Chemical Business. Currently, many chemical sectors are still struggling. As the economy, in general, and bromine products, in particular, improve, we will be well positioned to identify the most profitable products for our new factory, allowing for the prompt delivery and assembly of the remaining tailored equipment. The company continues to explore export opportunities to enhance financial flexibility. Presently, the export market is quite depressed, and we are looking for products that we can produce profitably and export, enabling us to obtain capital, which we may continue to use for share repurchases or dividends. We are continuously discussing with the government of Daying County regarding the establishment of a joint venture for the exploration and production of natural gas and bromine products. While there is no guarantee that such a joint venture will materialize, if we succeed in partnering with the local government, significant opportunities could arise. Our financial results, including the income statement, balance sheet, and cash flow statement for the three and six months ended June 30, 2023, have been filed with the SEC and present a full description of the segments of our business and the factors contributing to our lower sales and profits. Thank you.

Xiaobin Liu, CEO

Hi, everyone. I'm Xiaobin Liu, the CEO of the company. First of all, welcome all of you to Gulf Resources' 2023 Second Quarter Earnings Conference Call. It has been a challenging time for the company, our industry, and the Chinese economy. We are focused on preserving capital and strategizing for opportunities ahead. We believe the economy will improve, and bromine and crude salt profits will increase as well. We are carefully refining our plans for the Yuxin chemical plant to produce products that generate a higher level of profit. We also continue to focus on identifying exportable products that can provide financial flexibility and support initiatives that enhance shareholder value. While we are uncertain about the approval of our proposed joint venture in Sichuan, the potential could be considerable, especially if we can partner with the local government. The company has approximately $115 million in cash and could move ahead to support the remaining bromine and crude salt factories. We remain committed to retaining our capital for the opportunities ahead. The company's investors have inquired about actions to increase shareholder value. We acknowledge substantial opportunities lie ahead. We believe the Chinese economy will recover and bromine prices will climb. The chemical facility will open, and we will identify products for export once we establish the joint venture. This could lead to stronger opportunities than previously anticipated. Management would like to remind our investors that management has traded over 11.5 years of compensation for shares in Gulf Resources. No one wishes to see the share price appreciate more than we do. We are dedicated to generating cash from exports. When our business improves, we will take steps such as hiring investment bankers or an investor relations firm, and consider mergers or acquisitions to achieve strong financial returns for you and for us. We are now open for the Q&A section.

Operator, Operator

The first question comes from Jay Bhullar, a private investor. Jay, please proceed.

Unidentified Analyst, Investor

I had a question for Mr. Liu. I wanted to ask, are you guys going to repurchase shares?

Helen Xu, IR Director & CEO

Sorry, I didn't catch that.

Unidentified Analyst, Investor

Are you going to repurchase shares? Because that would be the best use of cash rather than speculating on a factory or exporting goods; you could just repurchase shares and increase the value for shareholders.

Helen Xu, IR Director & CEO

Okay.

Xiaobin Liu, CEO

I had a question for Mr. Liu. Are you planning to repurchase shares? Because that would be the best use of cash rather than speculating on a factory or exporting goods; you could just repurchase shares and increase the value for shareholders.

Helen Xu, IR Director & CEO

Okay, so, Hi Jay. This question has been addressed previously by investors as well, and as the company has explained before, due to restrictions imposed by the Chinese government regarding money going overseas, the company does not have U.S. dollars in overseas bank accounts. Therefore, we are trying to find a way to maintain dollars overseas. We clarified that the company is seeking products with higher profit margins that can be exported. This way, we can retain dollars in our overseas accounts and subsequently consider actions that enhance shareholder value, including share repurchase and dividends.

Operator, Operator

Okay. The next question comes from Alan Parka, a private investor.

Unidentified Analyst, Investor

I don’t think the fund manager is on the call. The question I have is regarding the share price. You will certainly hear concerns from investors; since you announced the delay in the chemical factory, the share price has plummeted to a ridiculous level compared to the book value of the company. If we wait longer for the chemical factory to create shareholder value, I don't know where the share price will be because investors are losing patience. So my question is: Is the company looking at other ways to create shareholder value or push the share price up? I've heard you talk about investment bankers, which I was happy to hear. But is there a task force, similar to the one for the chemical factory, focused on improving share price?

Helen Xu, IR Director & CEO

Maybe my understanding is not clear. Could you clarify?

Unidentified Analyst, Investor

I'm just asking if there is someone internal, like the CEO or CFO, responsible for looking at improving share price before the chemical factory opens. I’m concerned because the share price has dropped significantly over the last several months.

Helen Xu, IR Director & CEO

Yes, yes.

Unidentified Analyst, Investor

You will do something before the chemical factory is operational? It could take another year or two, and I'm concerned about the falling share price.

Helen Xu, IR Director & CEO

Okay.

Xiaobin Liu, CEO

Yes, yes. You will do something before the chemical factory is operational? It could take another year or two, and I'm concerned about the falling share price. Okay.

Helen Xu, IR Director & CEO

Hi Alan. The company management is always looking at the share price, including the CEO and the CFO. We see the share price dropped significantly, mainly due to the large decline in bromine prices, which fell from over RMB 60,000 to around RMB 18,000 per tonne, reflecting a more than 70 percent drop. This significant decline in bromine prices has clearly affected our share prices. We are all concerned about the share price. Therefore, we have two major strategies in mind. Firstly, we are reviewing our chemical business and the related products, as this area is currently characterized by very low profit margins. This is why we decided to pause the remaining equipment delivery. We aim to identify products with a higher margin to generate significant net profit for the company, which may in turn, increase the share price. Secondly, we are deeply exploring options with Sichuan Daying to improve our development processes and expedite our efforts. This should provide us with significant opportunities to explore and produce bromine, halogen, and natural gas, leading to more potential net profit.

Unidentified Analyst, Investor

Okay. I’ll let other people ask questions. I have a few follow-up questions, but it seems like the bromine prices are coming back up while the share price continues to decline. It's concerning.

Operator, Operator

The next question comes from Frank Manning, a private investor.

Unidentified Analyst, Investor

Your balance sheet shows cash of $115 million at the end of Q2. Your income statement shows interest income of approximately $72,500 for Q2, which is under 0.3% annual interest for the average cash. Why is that interest so low? Is there a conservative approach to increasing the interest yield?

Helen Xu, IR Director & CEO

Okay.

Xiaobin Liu, CEO

Okay.

Helen Xu, IR Director & CEO

The company takes a conservative approach with its cash holdings; hence, we haven't engaged in any high-risk financial products but have kept the funds secure. Given past issues with certain investment vehicles, we chose to prioritize safety over higher returns. This conservatism explains the low interest earnings.

Operator, Operator

The next question comes from Kumin Ken from Dorel Capital Corporation.

Unidentified Analyst, Investor

I have a few questions. First, in the last quarter report, Mr. Liu mentioned exploring the export of chemical products. Can you provide insight on what concrete plans you have or if you've hired people knowledgeable in exploring these export opportunities?

Helen Xu, IR Director & CEO

Xiaobin Liu, CEO

Unidentified Analyst, Investor

My next question pertains to the significant fluctuations in bromine prices. They have dropped notably from $69,500 per tonne in October 2021 to approximately $18,000 per tonne in October 2023. What are the driving forces behind this dramatic price fluctuation?

Helen Xu, IR Director & CEO

Okay.

Xiaobin Liu, CEO

Helen Xu, IR Director & CEO

The decline in bromine prices is largely tied to the real estate developments in the country; the real estate sector’s decline has heavily impacted bromine demand. The COVID-19 pandemic is another significant factor, as there was a high demand for bromine pre-pandemic, which subsequently dropped after the crisis subsided. Additionally, the challenges faced by the pharmaceutical export sector, as bromine is a key ingredient, also contribute to the price drop.

Unidentified Analyst, Investor

From your perspective or experience, do you anticipate that bromine prices will stabilize in the short or long term? This is crucial for revenue and shareholder prices.

Helen Xu, IR Director & CEO

Okay.

Xiaobin Liu, CEO

Okay.

Helen Xu, IR Director & CEO

Given that bromine is a fundamental chemical raw material, its resources are limited. Prices are more likely to rise if they go beyond RMB 60,000, but they should hover around the RMB 10,000 mark for realistic market reflection. Our goal is for bromine pricing to stabilize and gradually improve, as that aligns with the company’s interests. We aim to eliminate substantial price fluctuations.

Unidentified Analyst, Investor

Lastly, regarding your oil and natural gas products, you’re pursuing a partnership with the government. Do you anticipate receiving approval to start production? Have you estimated potential revenue and profit margin if production begins?

Helen Xu, IR Director & CEO

Our goal is for bromine pricing to stabilize and gradually improve, as that aligns with the company’s interests. We aim to eliminate substantial price fluctuations. Lastly, regarding your oil and natural gas products, you’re pursuing a partnership with the government. Do you anticipate receiving approval to start production? Have you estimated potential revenue and profit margin if production begins?

Xiaobin Liu, CEO

Our goal is for bromine pricing to stabilize and gradually improve, as that aligns with the company’s interests. We aim to eliminate substantial price fluctuations. Regarding your oil and natural gas products, you’re pursuing a partnership with the government. Do you anticipate receiving approval to start production? Have you estimated potential revenue and profit margin if production begins?

Helen Xu, IR Director & CEO

No, as this is a discussion with the government, we do not have a timeline yet.

Operator, Operator

The next question comes from Randy Liggett, a private investor.

Unidentified Analyst, Investor

Hey, how are you? Sorry for all my emails, by the way. Obviously, every shareholder is frustrated; we have gone through this for several years, and no matter the price of bromine. Why are we being so slow in hiring investment bankers and a PR firm? I just don't understand why we keep discussing this quarter after quarter. The price of bromine was $70,000, yet the stock did not reflect the value of the company. I believe management, including yourself and the Board, would want the stock to rise. My second question is: Have you received unsolicited offers to purchase the company or take it private?

Helen Xu, IR Director & CEO

We have been discussing this for several years, and regardless of the bromine price, I cannot comprehend why there is a delay in hiring investment bankers and a PR firm. It is perplexing that we continue to address this each quarter. The bromine price was $70,000, but the stock did not align with the company's value. I trust that management and the Board would prefer to see an increase in the stock price. My second question is whether you have received any unsolicited offers to buy the company or take it private.

Xiaobin Liu, CEO

No matter the price of bromine, I don't understand why we are taking so long to hire investment bankers and a PR firm. We keep discussing this issue quarter after quarter. The price of bromine was $70,000, but the stock did not reflect the company's value. I believe management, including you and the Board, would want the stock to rise. My second question is: Have you received any unsolicited offers to purchase the company or take it private?

Helen Xu, IR Director & CEO

First, as we previously explained, our goal is to eventually discuss working with investment banks or PR firms; however, we have not made significant progress yet. This is because if we engage with an investment bank, they will want to see the company’s developmental value and how we plan to improve it. However, due to our current cash position and underperforming projects, we are unable to meet their expectations currently. Once we clarify our project status, we will advance discussions with investment banks.

Unidentified Analyst, Investor

Have you received any unsolicited offers?

Helen Xu, IR Director & CEO

No, the company has never contemplated selling, despite the current low share price. We firmly believe in our substantial potential and are confident in it.

Unidentified Analyst, Investor

So you have not received any outside interest?

Helen Xu, IR Director & CEO

No.

Unidentified Analyst, Investor

I appreciate all your help. Please update the website, and continue to provide communication updates. Sometimes I feel like we are regressing. I believe it’s important for shareholders to hear from you.

Helen Xu, IR Director & CEO

The website will be updated right after the quarterly results including the CEO and CFO letters. To ensure fairness in information dissemination to all shareholders, we want to maintain transparency for our investors. Thank you, Randy.

Operator, Operator

We have a question coming from Bill Bender, a private investor.

Unidentified Analyst, Investor

Good morning, Helen. This question is general, but I've been an investor for over 10 years and share many of the sentiments expressed by previous callers. Over the past five years, we have discovered natural gas. Then we faced setbacks, and made significant investments in bromide factories, even though a few are not yet open. We were banking on this new chemical factory for 2023 that was intended to launch in January; it is now August. The delays in equipment due to COVID are no longer an issue; you can access goods globally today. The frustration is building because we continue to go quarter to quarter with the same narrative. I am sorry, but the bromide price is not the core issue; the concern is investor confidence. Management, Mr. Liu, and the Board have put their own money on the line—they want the share price to rise. All of the callers, including me, who have been invested for years share the same concerns. We've been hearing the same story of delays without resolution. After years of investment, if I choose to remain an investor for the next three months, could Mr. Liu explain why I should hold on to my shares instead of selling them at $2 each?

Helen Xu, IR Director & CEO

To clarify about our chemical factory, bromine prices have decreased drastically from nearly RMB 70,000 to RMB 18,000, representing over a 70 percent decline. This is similar for chemical industries as well. The chemical factory is nearing completion, but the equipment required for customized products has indicated lower profit margins, leading to our decision to pause the remaining equipment delivery. We are focused on identifying products that can generate more net profit for the company and our shareholders, which we hope can in turn uplift the share price. Regarding our natural gas venture in Sichuan Province, the provincial government is currently planning resource allocations. The company is awaiting the completion of this planning process to proceed with further applications to the government, which led to these delays. We recognize the significant opportunity in this market and are actively pursuing collaboration with the government to explore establishing a joint venture company that could open new avenues for us.

Unidentified Analyst, Investor

The conservative strategy is concerning; I was an investor when bromide prices were at $2,000, and we were very profitable. The prices will sway for the next decade. We are building a business that needs to adapt to market variations. Relying solely on the chemical factory's success is alarming, especially when it seems that product deliveries are delayed. The chemical factory was supposed to be operational several months ago, causing loss of investor trust. Every quarter’s call reiterates the same narrative of delays. Confidence is dwindling amongst investors, leading to decision-making being driven by frustration. Our shares have been declining over time, posing significant questions about our strategy and the perception that we are stagnant. Are you making proactive efforts to assure investors or is someone appointed to deal with keeping share prices stable?

Helen Xu, IR Director & CEO

Thank you for your continued feedback. This resonates strongly with our management team. We certainly are aware of the fluctuating bromine prices impacting our business. However, management and the Board strive to improve operations moving forward, as concerns raised by our investors are imperative for us to address. We appreciate your patience and please trust that we are working diligently to stabilize our operations and improve our overall performance.

Operator, Operator

Thank you, everyone. I would like to turn the floor back to Helen for any closing remarks. It appears we have reached the end of our allocated hour, do we have any more questions?

Helen Xu, IR Director & CEO

I believe that concludes our discussion for today. Thank you for your time.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time.

Helen Xu, IR Director & CEO

Thank you and have a good night.