Gulf Resources, Inc. (NASDAQ:GURE) Q3 2023 Earnings Call Transcript

Gulf Resources, Inc. (NASDAQ:GURE) Q3 2023 Earnings Call Transcript November 21, 2023

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

Helen Xu: Thank you, operator. Good morning, ladies and gentlemen, and good evening to all those joining us from China and U.S. And I like to welcome all of you to Gulf Resources third quarter 2023 conference call. I am Helen Xu, IR Director and CEO of the company; Mr. Xiaobin Liu, will also join this call today. I would like to remind you to all our listeners that in this call, certain management statements during the call will contain forward-looking information about Gulf Resources in corporation, and its subsidiary business and products within the meaning of Rule of 175 on the Securities Act of 1933 and the Rule 3b-6 under 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 a number of risk factors, including but not limited to the general economic and business condition in the PRC, the risk associated with COVID-19 pandemic outbreak; future product development and production capabilities, shipments to end customers, and market acceptance of new and existing products, additional competition from existing and new competitors from the bromine and the other oilfields and power production chemicals, changing technology, the ability to make future bromine assets and the risk other factors beyond its control.

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All forward-looking statements are expressly qualified in their entirety by this cautionary statement and the risk factors detailed with the company’s reports filed with the SEC. Gulf Resources assumes no obligation to revise or update any forward-looking statements, to reflect events of circumstances after the date of this call. Accordingly, our company believes expectation reflecting in those forward-looking statements are reasonable and there can be no assurance of such will prove to be correct. In addition, any reference to the company’s future performance, represent the management’s estimates as of today, the 20th of November 2023. For those of you unable to listen to the entire call at this time. A replay will be available on company’s website, the call is also accessible through the website and link is accessible through our website.

So please locate our press release issued earlier for the details. Before focusing on the major contents of this conference call, I would like to briefly discuss the proposed change in our chairmanship Mr. Yang founded our company and Mr. Liu joined the company in 2007 and become CEO in 2009. Mr. Liu who has investment in many companies in Sichuan Province, has decided not to stand for reelection as Chairman at the annual meeting on November 30, 2023. The board has nominated Mr. Liu to serve as our next Chairman. We would also like to refer to a recent press release discussing our prevention plan. As we issued earlier that in year 2018, Shouguang city experienced that in last impact of typhoon of India [ph] regarded as one of the most destructive typhoons in history, resulted in the region receiving 14.9 inches of rainfall, and the overflow of three major surveys along the Miho River led to extensive flooding in farmland, residential routes and industrial factories.

All of the company’s bromine factories, crude salt tanks, and mining areas it was seriously impacted, the company incurred substantial expenses amounting for more than $40 million including the write-offs and the road repairs, equipment replacement, salt pan reconstruction and redrilling of flood wheels. A year later, the Typhoon Lekima struck Shouguang city again, surpassing the destructive force of its predecessor. Once again, the company had to spend more than $6 million to rectify the aftermath involving the road repairs, equipment replacement, salt pan reconstruction and the feeling of offsetting will. So, to mitigate the similar damages in the future, the company had commenced of the provision initiative. Our strategy involves the renovation of the channels of four major rivers within our mining area, in combating the Tributary of Miho River.

The aim is to prevent flooding that could have the wells, aqueducts, and crude salt pans at our plant. The projected expenditure for this initiative amounts to approximately $50.5 million. As of this quarter, ended by September 30, 2023, the company disbursed amounted approximately $15.15 million for the initial phase of this project. Apart from reducing risk to surrounding regions, we anticipated that there are three notable advantages from this flood provision plan. It is expected to, firstly, enhance the probability of opportunity approvals to reopen factories number two and number 10. Secondly, enable the drilling of additional wealth across our five operating factories. And number three mitigates the risks and associated expenses related to future stops induced flooding.

Given the company’s current financial position and its substantial cash resources, the company believes that the floor protection plan will yield favorable returns over the long-term to the company. So now let’s turn to the results of the third quarter and the nine months. During the third quarter, the sales declined by 74%. Net income after tax was a loss of approximately $1.8 million compared to approximately $9.0 million. Net loss per share was $0.17 compared to a net profit of $0.86. Shareholders’ equity was approximately $260.8 million or $24.99 per share. Total results for the three months ended September 30, 2023, in the third quarter of 2023, revenue only declined by 74% to approximately $5.9 million from approximately $22.9 million.

Especially the bromine revenues declined by 75% to approximately $4.9 million from approximately $19.8 million. The decrease in this net revenue was primarily due to the reduction in the volume of tons sold 43% and a 57% decrease in the average selling price of bromine. During the quarter, the average selling price was $3,237 compared $7,474. As of November 16, 2023, based on the sensors.com data, the price of bromine has seen an increase of approximately 7.4% to $3,477. The decrease in selling price of bromine reflects both economic weakness in China and an excess inventory of anticipated. Following the aftermath of COVID, the reduction in tons sold reflects the company’s strategic decision not to engage enterprise competition, aiming to safeguard the long-term value of its resources.

Additionally, crude salt revenues declined by 70% due to an 18% decline in pricing and a 63% decrease in tonnes produced. As crude salt is a byproduct of bromine, the decreased production of bromine, resulting in a reduction in production of crude salt as well. There were no revenue generated from our chemical products business yet, while our natural gas business obtained approximately $68,000 in revenue through its equipment leasing. Gross profit for the quarter was amounted to a loss of $580,000 compared to a profit of approximately $14.5 million in the previous year. Especially, our bromine business suffered a gross profit loss of approximately $1.1 million compared to a profit of $12.5 million while crude salt achieved a gross profit of $511,500 compared to $1.9 million previously approximately.

The company incurred direct labor and factory overhead amounting to approximately $1.0 million during the plant shutdown, compared to approximately $1.9 million previously. General and administrative expenses were approximately $762,900 compared to $584,500 previously. Consequently, our loss from operations was amounted to approximately $2.3 million, compared to a profit of approximately $11.9 million in the period prior year. The net income after tax was a loss of approximately $1.8 million, compared to a profit of approximately $9.0 million, and the net loss per share was $0.17 compared to a net profit of $0.86. Results for the nine months ended September 30th, 2023, revenues over nine months declined by 51%, decrease of approximately $23.2 million from approximately $47.5 million.

Specially, bromine revenue also fell by 51% from approximately $20.7 million from approximately $41.9 million. Notably, there was a 9% increase in bromine cost, reflecting the addition of section number eight. However, despite this, the gross profit margin decreased to 7%, down from 57%. Throughout the nine months, the average selling price of bromine was $3,493 per tonne compared to the previous of $7,674 per tonne. Revenues from crude salt also declined by 51% to approximately $2.3 million from approximately $5.5 million. While the production volume declined by 31%, no revenue was generated from chemical business yet. Conversely revenue from natural gas increased by 13 percentage from the equipment levy. The gross profit for nine months totaled approximately $2.7 million, compared to $26.4 million.

Especially the bromine business accrued a gross profit for approximately $1.5 million, compared to approximately $27.7 million in the previous period. Our crude salt business achieved a gross profit of approximately $1.0 million compared to approximately $2.6 million. Meanwhile, the Chemical business recorded no gross profit and the natural gas business marked a gross profit of approximately $150,000, compared to approximately $132,600 previously. The company incurred direct labor and factory overhead during the planned shutdown amounted to approximately $4.5 million compared to approximately $6.0 million in the previous period. General and administrative expenses were approximately $2.3 million compared to approximately $3.4 million as previously.

As a result, our loss from operations were amounted to approximately $4 million compared to a profit of $17.0 million as previously. Net income was a loss of approximately $3.0 million, compared to a profit of $12.7 million previously. And the net loss per share were $0.29, compared to a profit of $1.22. Cash flow during the nine months ended by September 30, 2023, we generated approximately $9.9 million from operating activities and invested approximately $15.2 million, primarily in our floor protection program. Balance sheet, as of September 30, 2023, our cash balance was approximately $103.8 million based on the shares issued and outstanding ended by September 30, 2003 that translated to $9.95 in cash per share. The net, net cash, which is cash minus or liabilities was $8.21 per share.

Working capital was approximately $10.07 per share. Shareholders’ equity was $260.7 million approximately or $24.99 per share. So now let me turn the call over to Mr. Liu for his additional commentary. Liu?

Xiaobin Liu : [Foreign Language].

Helen Xu: So here is the remark from Mr. Xiaobin Liu, the company’s CEO. First of all, and the company’s CEO, Mr. Xiaobin Liu. Welcome all of you to attend the Gulf Resources Third Quarter 2023 Earnings Conference Call. In the third quarter, our results were adversely impacted by the diminished price of bromine, we attribute this drop-in price to two major factors. First, the sluggish state of the construction market in China led to reduced purchase of bromine for fire retardant application. Secondly, the warning impact of COVID pandemic resulted in decreased demand for bromine in medical instruments and sterilization. Despite these challenges, our company remains optimistic about the long-term equilibrium of bromine’s demand and supply, we still continued.

We anticipate a research in demand of bromine-based products and emerging products such as zinc and bromine batteries and new medical products presents opportunities for sustained demand growth. However, the supply of bromine continues to be constrained. Notably, based on 2022 production data, we estimate probably over 75% of global bromine production is concentrated in regions like Israel, Jordan, and Ukraine, which currently states military conflicts or wars. We adopt a prudent strategy in navigating the market. We have held back seeking approvals to open section number two and number 10 as we await improved pricing. Additionally, we have postponed the procurement of the final equipment of our chemical factory, clear insights into opportunities for innovative bromine products.

We have scaled back our sales, anticipating higher returns from future bromine sales. Since the end of the quarter, we have observed a gradual, but consistent uptick in the market price of bromine. We are monitoring the events in the Middle East, recognizing that any disruption in the better sea region could certainly unload the market dynamics. Looking ahead, the ambition returning to profitability in the fourth, coming quarter. Moreover, we aim to progress with the opening of our chemical factory, obtaining approvals for our remaining two bromine factories, and ideally resuming our natural gas and broad exploration in Sichuan Province. So now we are open for the question-and-answer section.

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Q&A Session

Operator: Thank you. [Operator Instructions]. The first question comes from Alan Perkaca [ph], she is a private investor. Alan, please proceed.

Unidentified Analyst: Good morning, Helen. Good morning, management. I given what happened in Q3, I have couple of quick two or three questions. My first question is, could you explain why there was a delay in the 10-Q filing in Q3?

Helen Xu: [Foreign Language]. Okay. Hi, Alan. This quarter’s delay in filing was because that auditors, they need more documents or materials when they are doing their review.

Unidentified Analyst: But yes, that’s, okay. It is not a fully audited quarter. It’s not like a 10-K. So, I am curious to know, what we are concerned about in the quarterly filing. But, okay. So, the auditors are the reason why you have some delay. My second question, if you don’t mind. My second question is regarding this flood prevention investments. And as just as I have already mentioned in the past that definitely we wanted the company to consider some action to mitigate the risk of flooding and I think that’s great. We are happy about that. The only thing that surprised us is that, we learned that last minute, so I don’t know when the decision was taken, but to learn last minute that we have a $50 million investment and that’s already $15 million against paying Q3. That was kind of a surprise to shareholders. So, when was the decision taken to make this $15 million underlying investment?

Helen Xu: [Foreign Language]. It was during the September in Q3.

Unidentified Analyst: And you were able to spend $15 million in September?

Helen Xu: No. I mean the decision you mean the final decision when was…

Unidentified Analyst: The decision to plan I mean to spend $15 million, when was the decision made towards? I just find it that shareholders find it interesting that we just learned about it and suddenly we are told $15 million has already been spent. So, we would have liked to have a little more of a warning, when you have made the decision to do this investment? The big question is how much do you expect to spend in Q4 of the $15 million?

Helen Xu: [Foreign Language]. Maybe in Q4, rest of the projects will be spent next $35 million approximately.

Unidentified Analyst: $35 million in Q4.

Helen Xu: Approximately.

Unidentified Analyst: The last point is regarding the bromine pricing and market. You have restricted production in Q3 because the price went pretty low. It was at a very low price at the beginning of Q3. Are you still restricting production in Q4? Or do you expect to go to full production in Q4? Whatever is full production, because it’s winter, so I know it’s not as high as in the summer.

Helen Xu: [Foreign Language]. Okay. So, hi, and here’s the response from you. Firstly, because we think the bromine price is in its recovery stage, and we think it’s under its current stage and we should not launch passion of our production alone. So, we estimate the production volume maybe will be similar as last year Q4, quarter-four focus. Secondly, we think because the Dead Sea region, the situation could alert market dynamics and the pricing of bromine as well. So, we are monitoring the events in the Middle East.

Unidentified Analyst : Yes. And regarding that, I mean, I’ve seen that the price of bromine outside that’s coming from the legalities are coming from the U.S. is higher than the price of bromine in China. Is the export team looking at the possibility of exporting some bromine to Asia, like to India or to Singapore? Has the export task force looked at that?

Helen Xu: [Foreign Language]. Hi, Allen. Firstly, because you know, the downstream of bromine industry are majorly in China area, but not in Asia. So, the main demand are here. And secondly, because bromine is very dangerous to transport, and the transportation cost is very high. So, based on these two factors we think if we wanted to translate, like you said, Asia and other countries and also Singapore, maybe we have to evaluate and monitor the market condition and to evaluate the cost and the benefit.

Unidentified Analyst : I think if the export platforms could look at that, that would be a great thing. Okay. Sorry for all these questions have been so long. Okay. But thank you very much for your answers.

Operator: The next question comes from John Smith with Gulf Resources. Please proceed.

Unidentified Analyst: Hello? Can you hear me?

Helen Xu: Yes. Hi, John.

Unidentified Analyst : Hi. My question — first thing I just want to say, thank you to the Chairman who has been with the company for a long time. He has done a good job building the business and I think the current CEO is in a good spot to take a spot and continue the good management. So, the first off is just thank you. After that my question goes off of Elaine’s question on the bromine. Look, thinking that we just spent $50 million in the flood prevention, that’s good. But if we could export some of that bromine, I understand the cost would be bad, and I think looking at it from an economic standpoint it might not make sense. But if you could just export $2 million, $3 million, $4 million, $5 million a year, you could use that money to buy back shares.

And with shares right now at an all-time low, that would instantly double, triple, quadruple times five the market value. So, I think you guys do a good job running the business. But if you want to bring back shareholder value, I think you need not just look at it from economic standpoint, but from the shareholder standpoint as well. And it is good for you. You guys could pay you guys’ self in stock at $8 a share. I mean, this stock would skyrocket, if you guys bought back 2 million shares, which at this price you could do easily. So, thank you.

Helen Xu: [Foreign Language]. Okay. John, thank you very much. We will consider about your suggestion. And by the way, we just want to say, that’s because bromine raw material is a very dangerous material during transportation, so there might be some partial requirements from the government policy when we want to export. But anyway, we will do more research on these projects, and see if we can do this.

Unidentified Analyst : Awesome. Yes, I understand it might be more expensive. But again, maybe even if you lose some money, it could really boost the stock price. Thank you.

Helen Xu: Yes.

Unidentified Analyst : I have one more question. Would you, on this hypothetical would the company right now we are valued so low compared to our worth? Would the company think about take like say $15, $20 a share, obviously hypothetical?

Helen Xu: What do you mean $20 or $15 per share?

Unidentified Analyst: Would you consider a buyout at $15 or $20 a share?

Helen Xu: You mean that’s for private or sell the company for what out?

Unidentified Analyst: Yes. If someone bought it for $15 to $20 a share, yes.

Helen Xu: [Foreign Language]. No. We don’t think about this currently.

Unidentified Analyst: And then I have one more question. The flooding, the big flood that happened so was that I think 2018, that caused the $40 million damage? If that were to happen again under the new flood plan. What would your estimates, would you think, how much cost would that cost the company if a very similar typhoon hit, after your provisions?

Helen Xu: [Foreign Language]. So, if, like, the similar typhoon as year 2018 again, after all this provision project. We think the cost for us to get everything down again it will be very few. Maybe around $3 million to $5 million we can finish all of the retirement.

Unidentified Analyst: That’s really good if that’s true. So that makes the plan seem a lot better.

Operator: The next question comes from Randy Liggett, Private Investor.

Unidentified Analyst: I’m afraid, I’m not going to be as nice as the first you guys, I mean this conference call sounds like the same one we’ve heard for last 10 to 15 conference calls. And I mean you just, it doesn’t sound like management has taken to heart one idea that investors have brought to them. Okay, the flood prevention plan, that’s fine. But we haven’t looked at advisors to help the company. Management’s fine with the bromide facilities and remediation of the facilities and all that stuff. They cannot and have shown they cannot enhance shareholder value. If anything, look at the price of the stock. I don’t understand the stubbornness why we will not higher advisors to help management get through this. And it’s just an anomaly to me.

I would think you guys would want to get pay. We would like to get paid and for heaven’s sake, if somebody offers, as John mentioned, $15 to $20 a share sign on the dotted line. This has been going on for how many years. And this is all fine dandy, but we keep pro. And I mean, we just talk about the same old stuff every conference call. And it’s like management does not listen to one thing investors are just throwing out there for ideas. I mean, look at it, look at where the stock closed down. I mean, $1.50 and I haven’t even done the math on the reverse split. I’m sure somebody on here probably knows that. But when is management going to wake up and listen to a few things that we are suggesting, go hire an advisor, please. I mean, I don’t know what else to say.

Also, where do we stand in negotiations with the local government on this gas, natural gas we’ve been talking about for how many years now? I mean, I can’t count the years. I’m going to be dead before all I’m joking when I say that, but I hope not because I mean the value is there and it’s like we don’t do anything. That’s what I’d like to hear about.

Helen Xu: [Foreign Language]. Okay. Hi, Andy. Thanks very much for your comments. And we want to say that, we have been always thinking about our shareholders, and how to reward our shareholders. At the beginning or maybe like last quarter, previous quarters, we were thinking that because we have many production lines, we wanted to have all our production lines to be like a more online or finished, then we can talk to IR firm to see how they can give us idea based on our ideal business model. And in order to help our investors increase our shares, as of now, based on — comments and based on the current situation, we may sync this in other one. And we will go to talk — consider going to talk with the algorithm to see based on what we can do now. Hopefully, you can help us to do more promotion and to increase the awareness of the company and the increase our rewards to our shareholders.

Unidentified Company Representative: I mean, that’s fine and dandy, but we are not doing anything to do it. I mean, I want to see — we talk about and talk about and talk about. No, I know. I am going on and on. I am going to get off in a minute. But it is the same thing. I mean, you can call, you have Chinese investment bankers, you have international investment bankers that work all over China. I mean, I just don’t get it. We are spending all this money all of a sudden on flood protection. And, we don’t want to go out and retain somebody to help us to realize the value in the company. I don’t get it. I mean, I really don’t. And, I have been around a long time, Helen. And it is…

Helen Xu: Yes. I know you.

Unidentified Analyst : Okay. What about the local government? Go ahead.

Helen Xu: Yes.

Unidentified Analyst: Yes. I mean, and there would be no reason to turn down $15 or $20 tomorrow afternoon. If somebody were to make that, I mean, my word, I think shareholders would jump up and down for joy and so with management. I mean, but where are we with the negotiations with the local government on natural gas, I don’t think you answered that unless I missed it.

Helen Xu: [Foreign Language]. Hi. In the Sichuan project, Sichuan province project, the local government, they have some new ideas come out in their mind, and there are some new competitors in the industry also come out. So, we are still doing the active discussion with the local government on this project.

Unidentified Analyst: I mean, have you all even thought about going to China Petro? What’s the big company that has the natural gas fund next to where yell in the land? What’s the big company? I mean, I don’t know why we don’t go to them and try to do a joint partnership. I just don’t get it. And then I’m going to keep quiet, Helen, and thank you for your help as usual.

Helen Xu: [Foreign Language]. So, because China venture, they do not, they instead of corporations, they just wanted to merge the company. So, we think this is not what we want. So that’s why we were looking for the cooperation with local governments. And during the discussion with local governments and there are some new competitors come out and the governments have some new ideas in their minds. So that’s why this discussion is still undergoing.

Unidentified Analyst: One other quick question since you brought it up. I mean, what did they want to buy? Did they just want to buy that natural gas field or what were they talking about?

Helen Xu: You mean China Metro?

Unidentified Analyst: Yes, ma’am.

Helen Xu: [Foreign Language]. The discussion on this kind of agreement, no matter with local governments or special channel or other companies. It’s very complicated. There are lots of items or criteria under discussed. And until it’s finalized and until we can have a final decision or whatever, we cannot talk too much about it.

Unidentified Analyst: I mean, one last comment. Please go hire an advisor this week. There are plenty of them out there that would take L1, spend a little bit of money with them and let them see what they can come up with, please. Thank you, Helen, as usual. Appreciate it.

Operator: The next question comes from Tom [indiscernible] Private Investor. Tom, please proceed.

Unidentified Analyst: Thank you, for taking my question. I have a few questions. I hope you can hear me.

Helen Xu: Yes. I got you, Tom.

Unidentified Analyst: So, the typhoons they hit in 2018 and 2019, and we are in 2023. I want to understand the reasoning for proceeding with this flood prevention program at this stage. So, I want to understand the management thought process on why the decision was made to proceed with this flood prevention program currently. And the second question, I have a series of questions, but just on the flood prevention. I want to understand why the management notified investors only after it had spent already spent a third of the projected expense for it. So, is there a reason for this delay in notifying the shareholders? And I also want to understand why a decision was made to proceed with the flood prevention at this stage?

Helen Xu: [Foreign Language]. So firstly, Tom, because, after the typhoons in 2018 and 2019, we want to, we have to evaluate the surrounding area and our main area to think so how to do this. Then we see, other companies, how they do it, until they finish, then we can learn some knowledge from them and experience from them. And at this stage, we think it’s a very appropriate period time stage to do this since we had more knowledge and we learned a lot from others. Second question, because we think this cost was like normal operating expense, we did not think it’s very normal. So, rates happened in Q3. And when we just disclosed it in our 10-Q to our investors.

Unidentified Analyst : Thank you. That sounds like a reasonable explanation. I want to get a sense of what the $15 million expense was? And I think from one of the other gentleman’s question, I understood that the remaining nearly $35 million was going to be spent in Q4. Is that assumption correct?

Helen Xu: Yes. Probably. Yes.

Unidentified Analyst : Okay. My next set of questions are with regard to previous gentleman asked, if the management would consider a buyout at $15 or $20 a share. And I think, the CEO answered that they would not consider it. And I wanted to get a sense of why they would not even consider it. And the reason is, around 2017, there was around $209 million in the company’s books. And as of this release, there is only half of that around $104 million or so. And so, we have gone through a period where there has not been much return for shareholders. It has been — not much value has been created. Actually, a lot of value has been decimated in the last seven years or so. And so, I just want to get a sense from a shareholder’s perspective, why the management would not even consider a buyout at, $15 or $20 per share.

Helen Xu: Hi, Tom. I think because this question we did discussed in previous quarters. Firstly, company will have our bromine business segment, even though now it is now very good, but because bromine price is very low now. But once bromine price increase or come to back to its normal price, our business is very profitable in this bromine segment. Then our natural gas in Sichuan province also have a big potential, because the concentration of the bromine resources there is very low. Third, our Chemical business. Even though now Chemical business are not online yet, but we have very confidence in this segment as well. So already — and bromine resources are limited resources, like, very few productions in the world. So overall, we think our — we have quite confidence in our company. So that’s why we do not consider to sell it at a $15 or $20 currently.

Operator: We have reached the end of the question-and-answer session. And I will now turn the call back to Helen for any closing remarks.

Helen Xu: Hi, operator. I think, if there is no more question, we can close for the call today because it’s time limit, time out. And welcome. If any shareholders have questions, can feel free to e-mail me. And I will be happy to respond to the e-mail as well.

Operator: Thank you. This concludes today’s conference. Disconnect your line at this time. Thank you for your participation.