Q2 2013 MFC Industrial Ltd Earnings Conference Call

Aug 14, 2013 AM EDT
MFCB - Mfc Bancorp Ltd
Q2 2013 MFC Industrial Ltd Earnings Conference Call
Aug 14, 2013 / 02:00PM GMT 

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Corporate Participants
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   *  Michael Smith
      MFC Industrial Ltd. - Chairman, President, and CEO
   *  Rene Randall
      MFC Industrial Ltd. - VP

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Conference Call Participants
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   *  Kevin McGrath
      Cameron Associates - Analyst
   *  Joe Pratt
      Wells Fargo Advisors - Analyst
   *  Emmett Wright
      Milwaukee Private Wealth Management - Analyst
   *  Graham Tanaka
      Tanaka Capital - Analyst
   *  William Horn
      First Angel Capital - Analyst
   *  George Burmann
      JP Turner - Analyst

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Presentation
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Operator   [1]
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 Good day, ladies and gentlemen, and welcome to the second-quarter 2013 MFC Industrial Limited earnings conference call. My name is Deborah, and I will be your operator today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. And I would now like to turn the call over to Mr. Kevin McGrath of Cameron Associates. Please proceed, sir.

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 Kevin McGrath,  Cameron Associates - Analyst   [2]
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 Thank you, and good morning. We appreciate your interest in joining us on MFC's conference call and webcast to discuss financial results for the three-and six-month period ended June 30, 2013. On the call with me today are Michael Smith, Chairman and CEO; and Rene Randall, Vice President.

 The Company will make a presentation on the results announced this morning and then open the call to questions. Today's call is being webcast on our website at MFCIndustrial.com. Simply click on the tab in the webcast section to access the webcast. The webcast will be posted at MFCIndustrial.com for replay approximately two hours following the end of this call. The replay will stay on the site for on-demand review for the next seven days.

 Certain statements in this conference call will be forward-looking statements which reflect management's expectations regarding future growth, results of operations, performance, and business prospects and opportunities. For detailed information about risks and uncertainties that could cause our actual results to differ materially from those expressed or implied, please refer to the disclaimer for forward-looking information contained in today's press release, on file with the Canadian securities regulators and on Form 6-K with the SEC.

 I'd now like to turn the call over to Michael to begin the discussion.

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [3]
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 Thank you very much, Kevin. And good morning, everybody. Let me first start by giving you an overview of the results for the first six months. And then let me see if we can talk a little bit about where we're going after I go through some of the various projects and what the status is of those projects, and where we see them coming online.

 Revenues for the first six months were up considerably, $253 million, for the period ending December to $376 million. I think what was important here -- two things. One is the margins were up a bit, which was important, up to $60 million from $51 million the prior period. But I think more important is the general administration expenses. Here, it is so important that we, number one, respect money. Number two, when we spend it, we want to get it back, of course. But if we don't do that, we will not build this platform, which we are attempting to do in quite a rapid manner. And our G&A expenses for 2012 was $20,700,000. For the three months, this year was $17.4 million; and for six months was $33.3 million. As you can see, we're putting a lot of money in the G&A area. And really, that is the key to our business. Because if we don't spend the money, we won't get the return and we won't be able to build a platform. So I think that's a key parameter for you to look to going forward. But also for us to control, but also to approve expenditures in that area.

 A couple of things that affected the results for the six months. Number one is our royalty for the Wabush mine. We -- I'll discuss Wabush entirely separately later, but from a bottom-line perspective, we lost $4 million in net earnings. Also, the last part of India -- India last year give us $12.3 million, and we had about another $6 million in miscellaneous bargain purchases, when you compare the periods.

 This is not a good reason for me to say that the earnings were not up to par. We have to overcome these issues, and we will and get our margins up. The most positive thing, as I said before, is that we are seeing the gross margin increase. EBITDA for the six months was $37 million. And depletion, which to us is an important factor as it [involves] cash, was $13.4 million, or $0.21 a share.

 For the three months ending also June 30, margins were also up on the comparable period from $26 million to $33 million.

 Touching on the balance sheet which is, of course so important to me, is that we had them -- $281 million in cash in December, and we have $330 million cash in June. So the Company is still quite liquid. Our receivables at December were $72 million, and our receivables in June were $100 million. Current assets were $684 million at December, versus $702 million in June. Working capital was up a little bit, $345 million in December to $373 million in June. Our current ratio, 2.02 at December, versus 2.13. Our asset test ratio at December was 1.2, versus 1.43 in June.

 Long-term debt to equity was 0.20.

 So the Company is healthy, but we still have other items which I think we can help improve this balance sheet. And I want to point out a couple of them to you. When you look at our inventories at June 30, you'll see them down to $107 million from the period of December of $142 million. That is accountingly correct, but practically not. We do have a current liability under, called deferred sales liability, of $26 million, which disappeared in this six-month period because the project it was involved with was closed out. We had a financial repo with Glencore, and that was expired in this period. So really, the inventories have not gone down. They are basically the same. And really, they shouldn't go down at this point. Of course, inventory is what we need to get some margins up to sell.

 I think another issue which is important is assets held for sale. The amount for December was $128 million as a current asset. And as a current asset at June was $106 million. The two different items there basically are a tale of the Indian operation and also some decommissioning obligations. And I'll explain that a little further as we go.

 If I can have you look at the long-term liabilities, and it's so important that we look at this decommissioning obligation. These are really long-term obligations. And one of our major projects is to eliminate this down to a more acceptable amount. And the ARO, or the decommissioning expense, there, as you can see, is down by $14 million this period. And why it's down is because the different way it's classified. And also part of it is from the current asset amount. But the decommissioning expense is not a P&L gain. When it goes down like this, it is a reduction of the interest in resource properties. So if you got back to the positive side of the balance sheet, you'll see that the resource properties have gone from $348 million from what they were in December $383 million.

 Also, I bring your attention to the equity section. And you'll see a cumulative income loss, which is the old translation adjustment of $14.9 million. And that also is because of the resource property. Because our resource properties are primarily Canadian dollars, and of course we are reporting to you in US dollars.

 So the balance sheet is okay, and it's fine to go forward. We do have areas to improve on, in which we will try. One thing is very relevant before I get into the projects themselves, is we have increased our lines of credit. As we see a requirement as we go forward now, as our revenues should increase, and our margin should follow. We've increased those lines from $405 million to $463 million.

 Let me turn now to various projects which we are involved in. The first one is really what I call a natural gas and our midstream operation. We have more defined now what we're doing in the midstream operation, and see a capital expenditure program in the maximum amount of [$220 million]. And we've also made a decision. And the decision is there -- we will bring in a partner, a strategic partner, for a small part of it. And I think that we've been going back and forth trying to understand if it was better to have a partner for the whole project or just for part of the project. And I -- we've now made that decision to do it for part of the project, and that is underway. And I can give you further clarity as that now is gets signed up and as we go forward.

 The natural gas wells which we have -- doing fine. Certain things we have done in that particular area. We have in the press release and in the 6-K -- we have shown you a breakout of our sale price. And you can work out there are actually costs there. But the price for gas which we achieved through the six months was $3.57.

 We are looking at some of the gas wells which are very small part of this group of gas wells. And we are looking to possibly go into, as a separate business unit, a stripper well-type operation. But I'll give you more development -- more information on that development as we go forward in the future.

 We have established a well cycling policy, and I think it makes a lot of sense. Our attitude now is that if the well isn't economic or the prices of gas isn't as sufficient for us to make money from the well, we will shut in that well and bring it back. There's no sense dissipating the asset. Leave the molecules in the ground. As long as we do it right, we'll get back at the right time, at the right price.

 Our land bank is fine. You know, we have just under 300,000 acres. Our attitude is just to leave it as a bank. We're not getting any interest on it. But if we get lucky with gas prices, it will give us a great return. And I see very -- the cost is very minimal, so I see very, very, very little downside with the land bank.

 Let me now touch on Wabush. You know, Wabush is -- last couple of years has gone up and down. Tonnage has been erratic, and our relationships with the mine owner there hasn't always been the best. But what the mine owner has done now, he has switched from making pellets to concentrates. This is a quarter which it actually occurred, and he starts to make concentrates this quarter.

 So the tonnage which you see that was produced, we don't believe you should look at that in any way except it's a changeover period. We think this is a good move for the mine. And iron ore prices themselves, you know, are only down by about 5% or 6% this year. Right now, the iron ore price is around $138 a ton. So our royalty rate should stay pretty constant -- actually, should go up. And so I think this is a positive for us. And, in addition, Cliffs had said that they are going to produce three million tons of concentrates, not of pellets. And they have some pellets in inventory, which they will be shipping. Unfortunately, we do not get paid until they ship. So the inventory on the ground there, we should benefit from it during this particular quarter.

 Pea Ridge. Pea Ridge has not been going as fast as we would like it to go, which is the development of iron ore project in the United States. So, I think we've done two things. One, we've clarified now, and are happy with, the process which we're going through and the direction. And we are not unhappy with what is occurring. We are just not happy with the timing.

 So we have recently transferred a very senior man, who was with us in Africa for 11 years, to run this project full-time. He's a very strong guy, a former lieutenant colonel in the South African commandos, I guess. And he will now act as what I call the general of this project, and he will take daily responsibility. And, in addition, (inaudible) daily, he will make the decisions. I think we all know where we are going; we've just got to move it along faster.

 The actual project -- the hydroelectric project, the conversion there, which he actually looked after as part of his prior duties, and also the refiner there, is on-time, on budget, and working out quite well. And we anticipate that to be in operation solely as a power producer before the end of the year.

 In the 6-K, you will see a picture of Mr. Steinbauer and Mr. Peter Leibold. You know, somebody said to me, never put pictures in any of your materials because you are wasting space for more acts. So people can see more acts of the Company. And I think they are right there. But in this particular case, I think it's appropriate. And the point we're trying to make here is that in 2005, we started to do business with Peter Leibold and his company, German Pellets. They had one facility in Germany. Now they have 14 sites in Germany and Austria, and are the biggest producer of pellets in the world.

 In addition, they have two brand-new facilities which they will commission this year in America. It's an example, I think, of here's a company that was a very, very small SME and needed financial help. And we also looked at them as a potential client. And we have very well together over these years. And we anticipate that to continue very much in the future. And I think we wanted to put Mr. Leibold's picture in here, number one, to congratulate him for his success, but also to thank him and his shareholders and his people for working with MFC all of these years.

 From the commodities business, we are seeing growth. We'd just got to see more increase in margins and continue the growth, and we will work hard to that. So that's the end of my opening remarks, and please, if I can invite questions now, it would be appreciated.



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Questions and Answers
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Operator   [1]
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 (Operator Instructions) Joe Pratt, Wells Fargo Advisors.

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 Joe Pratt,  Wells Fargo Advisors - Analyst   [2]
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 Could you just tell us a little bit about with your commodity trading acquisitions, when you acquired them in December, or during last year; what you thought the margins would be by this time this year, let's say the June quarter? And what are those actual margins, and what have those margins turned out to be as they -- as those businesses were combined with your prior commodity-trading operations?

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [3]
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 Joe, it's difficult to segregate because the businesses are entirely different. And we are now putting (inaudible) factory products which were sold in the past out of New Jersey. They are now being sold in Argentina and also in Europe. That particular industry, those margins, have come down because they are steel orientated. And in some cases, they've come down by 30%. In other cases, other products which they have now gone into have increased.

 So you're seeing a change of mix. And I think it's so important -- and I'm not disappointed in those margins; I'm actually quite happy. Because what it's done is given us a more global footprint. But it's also given us more products. And the real key to this is China. And you know, we've always had a presence in China, and we've now integrated those operations in China. And that's the key to the one word [called] sourcing at a reasonable price. And as long as we can source at a reasonable price and finance at a very reasonable price, we then have -- we should have stronger margins everywhere. And that's what we're working on very, very much.

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 Joe Pratt,  Wells Fargo Advisors - Analyst   [4]
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 Okay. And second, when you talk about the G&A going up substantially, what businesses is the G&A getting invested in?

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [5]
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 For instance, we are getting lots of younger people, Joe, in the business. We should have been hiring lots of younger people a long time ago and transferring them throughout our system. But we are doing that now, and it's predominantly being involved in rationalizing the natural gas business. It's being done also in the trading and purchasing of commodities. So it is overall. We are encouraging hiring everywhere. And also, Joe, we're also transferring. You know, we're taking people from, Argentina, and we want those people from Mexico to go to New Jersey. We want those people in China to be transferred to Vienna. We are trying to integrate, communicate to get better margins. And I'm very impressed with a couple of them who just have become good stars. And that, I think, is an area of weakness for us in the past.

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 Joe Pratt,  Wells Fargo Advisors - Analyst   [6]
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 Okay. And thirdly, with regard to the German Pellet company, did you ever assist them financially in the past? And do you own any part of them?

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [7]
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 We've been assisting them since 2005, and we anticipate assisting them for years to come, including their operations in America --- their new operations. They have two new phenomenal facilities that they are commissioning as we speak. And it's been a good client, and we anticipate more of that.

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 Joe Pratt,  Wells Fargo Advisors - Analyst   [8]
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 But do you own any part of that company?

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [9]
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 Oh, I'm sorry, Joe, we do not own any part of that, no.

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 Joe Pratt,  Wells Fargo Advisors - Analyst   [10]
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 Okay. Thank you.

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Operator   [11]
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 Emmett Wright, Milwaukee Private Wealth Management.

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 Emmett Wright,  Milwaukee Private Wealth Management - Analyst   [12]
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 Just to clarify, when you talked about Compton and the need for $220 million in CapEx and, in the same sentence, talked about a strategic partner for a small percentage, is that $220 million what would accrue to MFC? Or is that (technical difficulty) and you'll slot some of that off on your partner.

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [13]
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 We will slough some of a reasonable and fair amount off on our partner.

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 Emmett Wright,  Milwaukee Private Wealth Management - Analyst   [14]
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 So the $220 million is gross?

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [15]
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 Gross, gross yes, sorry.

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 Emmett Wright,  Milwaukee Private Wealth Management - Analyst   [16]
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 How much can we assume you'll — how will you allocate that $220 million to partner versus yourself?

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [17]
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 We (inaudible) not get into that and I'll tell you the reason why you can understand it. The assets which we have — midstream assets that exist today — will be sold to a structure. And the selling price to the structure will help them determine what our final contribution is. And, of course, that will be an issue of negotiations. All I can say it will be fair and everybody has to make money with it. But I can't give you a final number at this time. In the future, we can get more transparent as we get clarity on the values.

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 Emmett Wright,  Milwaukee Private Wealth Management - Analyst   [18]
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 I appreciate that. Follow-up to that with regard to some of these wells that you might idle given the economics. Will this impact your bargain price accounting retrospectively?

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [19]
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 Not at all. Because the molecules will still be in the ground. I just don't like it when the molecules come out of the ground and you sell them, right. If you don't sell them for a proper price, why produce them? Turn them off, right.

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 Emmett Wright,  Milwaukee Private Wealth Management - Analyst   [20]
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 Yes, yes, most definitely. And back to Joe's question earlier, my final comment here. With regard to the transactions that occurred at year end and you talked a little bit about how that's working. But how is that working related to your expectation at the time you made that transaction?

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [21]
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 Not as well is my expectation. I believe we can do it much faster but we had cultures right and it took a while to break down cultures and barriers. I think moving in integrating people together helped break down those barriers, but it could have been done faster.

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 Emmett Wright,  Milwaukee Private Wealth Management - Analyst   [22]
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 You know, anecdotally, in reading your releases and understanding the guy from Mexico's going up to Jersey or something like that, it struck me that that was a pretty good sale, that you have to make to the guy in Mexico or Argentina or somewhere to move to another area. Is that effectively what's happened? And how do you mitigate that in the future?

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [23]
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 That is what has happened. And I find that, you don't say move to America forever, right? You say move to America for a year, and you got to go at least a year or move to Shanghai for a year. It's been well received and been encouraged. And these people are college graduates, CFAs, they are -- maybe they've been there five, six, seven years in sales. And you can see some complementary items. So they have -- it's just not moving there and becoming an American. It's moving there and assisting with communication with Mexico and New Jersey. Both those companies buy products from China. They should buy those products for the most reasonable price possible, but especially for the most reasonable price from a freight perspective.

 Freight is a big driver. And so it may seem silly, but communication is so important. And by having these people who know how to get it done and know how to speak the languages, and know that yesterday was a holiday is important and it's working now. I'm pleased with that.

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 Emmett Wright,  Milwaukee Private Wealth Management - Analyst   [24]
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 Good, glad to hear it. Thank you and good luck.

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Operator   [25]
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 Graham Tanaka, Tanaka Capital.

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 Graham Tanaka,  Tanaka Capital - Analyst   [26]
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 Yes, just if you could give us a little help on timing. Little bit more maybe specific on timing of Compton, Pea Ridge, the PowerGen facility in Africa. And then I have some other questions about trading. But just when might you be doing -- making -- consummating deals on Compton, for example? And what -- would you be pulling cash out, or will you be basically transferring assets and owning smaller part of a better-funded opportunity?

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [27]
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 So on Compton, I guess, just to simply say, we viewed it first, it had a large tax-loss carry-forward. So we created a partnership there for some of our other assets to be joined, to help us be fiscally responsible tax-wise.

 Two, we're taking the midstream operation and developing that. And we are in the engineering and the purchasing cycle for that. And we've agreed to now take in a partner for part of it. Timing for that is -- goes in phases, but the first phase will -- let's just say, middle of next year, and then three years for final. And that's a well laid out plan.

 The next part of that natural gas program really is the development of the stripper wells. And I think that will be very shortly. When I say shortly, two or three months.

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 Graham Tanaka,  Tanaka Capital - Analyst   [28]
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 I'm sorry, shortly would be when?

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [29]
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 Two or three months.

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 Graham Tanaka,  Tanaka Capital - Analyst   [30]
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 Okay. So, two or three months, you'd be starting development -- drilling developmental wells or stripping wells? Or (multiple speakers) --

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [31]
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 No, no, no, no. Just taking ourselves and other low-volume wells, from ourselves and from other people, and running them in a more efficient way. You could call it -- you shouldn't call it that. You should call it -- we shouldn't call it the [junk] part of the business. But most people don't like that part of the business, and to me, it's okay if you run it on a basis that it is not an oil company or gas company. It's just a company trying to turn cash and make some money. And I find that there's ways you can cut costs when you have lots of things. And we see some people have the same need to put some of their shallow wells, low-volume wells in our wells; and we can make a much, much more substantial company outside of Compton. That's just a business opportunity to help us rationalize the assets of that (inaudible - multiple speakers).

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 Graham Tanaka,  Tanaka Capital - Analyst   [32]
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 What are we talking about as potential either cash flow, revenues, or profits that you can get in once you develop more efficient stripper wells?

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [33]
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 We should not give that out at this particular point, Graham. But all I can say to you is that there's a lot of them out there, and a lot of them have a great need to be run more efficiently and can be. And we see that the numbers, to us, are interesting enough, and the numbers also from a capital perspective are not great. So to us, that's one which we must push to pursue rapidly.

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 Graham Tanaka,  Tanaka Capital - Analyst   [34]
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 So you're going to be working with other companies to actually pool their low-volume wells into this pool?

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [35]
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 Yes, you know, our people don't have -- our people don't mind doing more menial type work, right? And so we say, let us give [us your] less economic wells, and let's put them together into a different unit. And I think that's been well received at this particular point.

 In reference to the hydroelectric plant in Uganda, I think that will be onstream with the proper tariff in October; we are ahead of schedule. So that's working out quite well.

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 Graham Tanaka,  Tanaka Capital - Analyst   [36]
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 What might that produce in revenues and/or cash flow profits?

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [37]
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 I'd sooner wait until we've got the license. We have the license now, but not in effect, before I say anything to you and to anybody in Uganda.

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 Graham Tanaka,  Tanaka Capital - Analyst   [38]
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 That should be producing revenues beginning in October or later after that?

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [39]
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 I think we're okay for October at this particular point. We did have a natural disaster there recently, but our people did a great job and solved that quite quickly.

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 Graham Tanaka,  Tanaka Capital - Analyst   [40]
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 That should help the fourth quarter, then?

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [41]
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 Yes.

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 Graham Tanaka,  Tanaka Capital - Analyst   [42]
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 And then how about Pea Ridge? The timing on that has been slower? I don't know if that -- is that because of problems with dewatering or just management problems?

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [43]
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 I don't know if it's management problems. I think it's really -- it's maybe the bus hasn't been driven hard enough. And this is really getting the process done correctly. And so by taking a real strong manager, who we have, and putting him in it full time, I think is a move we should have made several months ago. And his job now is to move it along quite rapidly. And I think that he would definitely save us time.

 And then from an end date, Graham, I can't give you an end date. It wouldn't be right.

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 Graham Tanaka,  Tanaka Capital - Analyst   [44]
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 Okay. So, if you could be a little bit more specific about the royalty situation. I mean, I guess there was an issue there -- the transition, you called it. Now, when is that transition going to be finished? And when will they turn the spigot on with the concentrate?

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [45]
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 It already is finished. And they've already turned the spigot on, and they are already producing. And, we believe, selling the concentrate today.

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 Graham Tanaka,  Tanaka Capital - Analyst   [46]
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 So they started when?

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [47]
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 The beginning of this quarter.

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 Graham Tanaka,  Tanaka Capital - Analyst   [48]
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 So they started in July?

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [49]
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 I'm assuming it was July, yes. But either way, they told us it was in this quarter. But we do know that they've stopped producing the pellet. They publicly announced that. They've given us some explanation as to what has occurred. So we are quite comfortable with that move. And I haven't said anything nice about Cliffs for many a year because we've always had litigation with them, and we still do. But this makes a lot of sense. And we can see that they can sell the concentrates today without having to pay the cost to pelletize.

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 Graham Tanaka,  Tanaka Capital - Analyst   [50]
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 Okay. So what would be the price per pound or ton that -- off which MFC would get royalties? It'd be a higher price or a lower price?

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 Rene Randall,  MFC Industrial Ltd. - VP   [51]
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 No, it's about the same.

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [52]
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 There is really no difference. The reason why you shouldn't sell pellets is because the iron ore prices -- or concentrates, there is not a huge difference, if any.

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 Rene Randall,  MFC Industrial Ltd. - VP   [53]
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 We're getting about [$9.34] average per ton, and that would be if it's pellets or concentrate.

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 Graham Tanaka,  Tanaka Capital - Analyst   [54]
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 Okay. So the reason we care whether it's concentrate or pellets is what?

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 Rene Randall,  MFC Industrial Ltd. - VP   [55]
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 We don't care.

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [56]
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 We don't. But we only get paid, Graham, on sales. And when it's sold, we get our royalty. But we just want them to be a success.

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 Graham Tanaka,  Tanaka Capital - Analyst   [57]
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 So this was just -- this is basically a transitional shutdown period for them to change their way of delivering iron ore, and that just took, what, few months?

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [58]
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 I don't even think it took a few months. I think that they also stockpiled pellets. And they don't -- you know, don't forget, we don't get paid until they sell that pellet.

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 Rene Randall,  MFC Industrial Ltd. - VP   [59]
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 And also concentrate -- they are already making concentrate because you have to have concentrate to send to the pelletizer anyway. So it's not like they are switching something. They are just taking one step out of the chain.

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 Graham Tanaka,  Tanaka Capital - Analyst   [60]
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 I guess to cut to the chase, then, what could royalties be going toward? Back to the sort of the normalized level per quarter? Or what kind of level do you think it should go to?

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 Rene Randall,  MFC Industrial Ltd. - VP   [61]
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 Are you speaking on price or volume?

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 Graham Tanaka,  Tanaka Capital - Analyst   [62]
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 Just dollars -- US dollars of royalty per quarter.

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 Rene Randall,  MFC Industrial Ltd. - VP   [63]
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 Well, they are staying about the same. I mean, if you look at the first and second quarter, they've only varied by about $0.02 a ton. So they are staying in the $9.30 to $9.35 range.

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [64]
------------------------------
 And Graham, use a number of 3.1 million tons for this year. 3.0 million to 3.1 million tons. That's what they are saying to us.

------------------------------
 Graham Tanaka,  Tanaka Capital - Analyst   [65]
------------------------------
 Yes, I was trying to get a feeling for what the third and fourth quarter royalty could be, or tons.

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [66]
------------------------------
 We think it could be quite handsome because they are shipping their pellets, which they hadn't sold prior, right? Which were inventory on the path, as we would say.

------------------------------
 Graham Tanaka,  Tanaka Capital - Analyst   [67]
------------------------------
 So the royalty, I'm just looking here -- I thought I had it on my quarterly sheet. The royalty in the first quarter was how much? You gave the first-half number.

------------------------------
 Rene Randall,  MFC Industrial Ltd. - VP   [68]
------------------------------
 $9.00, $9.35 a ton.

------------------------------
 Graham Tanaka,  Tanaka Capital - Analyst   [69]
------------------------------
 And the dollars that we receive?

------------------------------
 Rene Randall,  MFC Industrial Ltd. - VP   [70]
------------------------------
 On a gross? On a gross, it was about $3.7 million.

------------------------------
 Graham Tanaka,  Tanaka Capital - Analyst   [71]
------------------------------
 That was the second quarter, right?

------------------------------
 Rene Randall,  MFC Industrial Ltd. - VP   [72]
------------------------------
 No, first quarter. Second quarter was about $4.3 million.

------------------------------
 Graham Tanaka,  Tanaka Capital - Analyst   [73]
------------------------------
 So then, the third and fourth quarter might be what relative to that? Closer to the $4.3 million?

------------------------------
 Rene Randall,  MFC Industrial Ltd. - VP   [74]
------------------------------
 We would hope so.

------------------------------
 Graham Tanaka,  Tanaka Capital - Analyst   [75]
------------------------------
 All right, that's good. The other thing we haven't heard much -- I think you referred to the importance of China. How large is that now, overall? I know you've got sort of medical operations, you've got a few things going on. Is that something we should focus on as a segment?

------------------------------
 Rene Randall,  MFC Industrial Ltd. - VP   [76]
------------------------------
 No, not as a segment. But China is growing because of -- we're doing more and more of buying raw materials for the commodities in China. So now our office, especially in Shanghai, is taking a much bigger role.

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [77]
------------------------------
 So you know, Eugene, Graham?

------------------------------
 Graham Tanaka,  Tanaka Capital - Analyst   [78]
------------------------------
 Yes.

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [79]
------------------------------
 So Eugene's people and the Beijing people, which we acquired, are now working as a team to source their existing products and also new products in China. And also then ship by -- of course, by sea, in a more efficient way by integrating all the freight together --

------------------------------
 Rene Randall,  MFC Industrial Ltd. - VP   [80]
------------------------------
 Consolidating the freight into one shipment.

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [81]
------------------------------
 Which brings down the cost very, very considerably. So that's why China is important, is because of that consolidation, as Rene called it.

------------------------------
 Graham Tanaka,  Tanaka Capital - Analyst   [82]
------------------------------
 So have you estimated what the cost savings could be per quarter per year once you've integrated, and once you've achieved efficiencies in the trading operations?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [83]
------------------------------
 We have a plan and a budget, but I -- we have not made that public at this particular point.

------------------------------
 Graham Tanaka,  Tanaka Capital - Analyst   [84]
------------------------------
 I just -- okay. I guess that what's hard for us is we're trying to make projections, okay? And it's kind of hard because so many things are in transition here. It comes along with the territory with several acquisitions at one time. But -- so is there way that you can -- if you don't want to give us the savings, and maybe is there way we can talk about sizing the trading operations in one or two years, and revenues? And what kind of a normalized margin might be for getting whatever the savings are? I mean, you're saying margins are going up. So where are they going up from, and to what?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [85]
------------------------------
 Graham, it's difficult. We believe our revenues are going up consistently and will, if we continue with this present operation. Margins must follow. If they don't, that's what we must correct. And we are trying there, but it's very difficult for us to give out to you at this point what our margins -- what we project them to be. I can say to is that we have a platform; we have the people; we are looking for more people; and we have the credit. And so if you have the tools, you should be able to build a pretty nice house. And so that's what we're trying to do. I'm sorry I can't be more specific, as the products and the product mix will change with demand, and demand in different areas of the world.

------------------------------
 Graham Tanaka,  Tanaka Capital - Analyst   [86]
------------------------------
 I guess, Michael, and pardon me for being -- if it appears a little persistent on this. But it's just a pretty big window when the commodities and resources margins were 13.88% for the first half of this year and 9.05% the first half of the year ago. That's a big window. And I just don't know, maybe you can comment on whether that 9% is unusually high. The impression was back then, I don't think it was. But is that unusually high? And how much of this year's 3.8% -- or 3.9% is a result of these temporary things that you are doing, you know, training costs, etcetera?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [87]
------------------------------
 Graham, you've also got to not look at this as a non-cyclical business. Commodities get sold at different periods of the year, and I think that's one of the issues that you're not seeing when you're trying to just go quarter to quarter to quarter. We can see if we achieve that particular sale of that particular product at that time, and what was the margin like. And I think it so difficult. You know, we've come a long way, but we've got a long way to go. Oh yes, for sure. And we're not there yet. I just can't -- all I can say to you is that if we continue with what we're doing, it's okay. Do we have the tools do it? Yes.

------------------------------
 Graham Tanaka,  Tanaka Capital - Analyst   [88]
------------------------------
 Maybe a different way -- I know it's hard for you to make estimates. But maybe a different way to get a feel for it so we can understand it is, you've acquired big operations and trading in different areas of the world with different commodities. (technical difficulty) diversified and we have -- we are trying to make estimates here of what you might be able to do in one or two years, okay? So will these new commodities in new operations tend to have lower or higher margins than the Vienna business?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [89]
------------------------------
 Higher margins.

------------------------------
 Graham Tanaka,  Tanaka Capital - Analyst   [90]
------------------------------
 They should have higher margins. So we have -- see, that tells me that there's very high probability that you should get your margins up closer to the 9%, which is what -- I believe is what the operation margins were before the acquisitions. Is that correct? The six-month last year, 2012, you had $21 million of net income, $21.5 million, versus $238 million of revenues first half last year. But was that restated for last year to include post (inaudible)?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [91]
------------------------------
 No, there was no restatement, Graham. I'm just not familiar with that particular period. All I can say to you, Graham, is that margins should increase. Long as you aggregate your freight, they will increase substantially. But margins will increase just because of the different products.

------------------------------
 Graham Tanaka,  Tanaka Capital - Analyst   [92]
------------------------------
 So, you should increase your margins relative to the first half based on both a higher, richer mix of new products and efficiencies on transportation sharing, etcetera? Is that --

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [93]
------------------------------
 And the real gift, if you want to call it, on your margin is the transportation.

------------------------------
 Graham Tanaka,  Tanaka Capital - Analyst   [94]
------------------------------
 Okay, so the transportation I don't -- not having analyzed the business before, I'm not sure what you're -- you're talking about freighters coming half-hull, half-full, or something? And container ships -- containers being more full and that kind of thing?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [95]
------------------------------
 Yes, Graham, if I charter a ship from Shanghai, making three stops down in Mexico, right, and I charter it for 80% of the freight on that ship or I have 10% of the freight, but my cost for the freight is hugely different when I control the vessel. And I also control the stops, right?

------------------------------
 Graham Tanaka,  Tanaka Capital - Analyst   [96]
------------------------------
 Oh, I got it. Right.

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [97]
------------------------------
 Stops are huge, right? Because -- (multiple speakers)

------------------------------
 Graham Tanaka,  Tanaka Capital - Analyst   [98]
------------------------------
 I didn't want to take too much of it, but I'm feeling a lot better about it. There's a huge opportunity because what's happening, it sounds like, is the cost of the integration is obfuscating the margin potential. Plus, you have not gotten the efficiencies yet, which you anticipate receiving one in the next 12 months?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [99]
------------------------------
 Yes, and that's why I am happy the margins are up. But they are not up enough.

------------------------------
 Graham Tanaka,  Tanaka Capital - Analyst   [100]
------------------------------
 Okay. Thank you very much.

------------------------------
Operator   [101]
------------------------------
 William Horn, First Angel Capital.

------------------------------
 William Horn,  First Angel Capital - Analyst   [102]
------------------------------
 I just wanted to clarify one of Graham's questions regarding Wabush. You state that Cliff is guiding toward three million tons of production this year. They've done just shy of 900,000, so that leaves over two million tons remaining for the next six months. That would put it at about a million tons a quarter. So your royalty should be substantially higher in the coming quarters, provided that Cliffs maintains their -- or meets their guidance projections, correct?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [103]
------------------------------
 Yes.

------------------------------
 William Horn,  First Angel Capital - Analyst   [104]
------------------------------
 I thought I heard Rene say that you should expect -- or the 4.2 is a reasonable expectation. But the expectation should be significantly higher than that based on Cliffs meeting their production schedule.

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [105]
------------------------------
 We see it to be substantially higher, Bill, driven by two factors. One, inventory on the ground to June 30. And we only get paid upon sale. Okay?

------------------------------
 William Horn,  First Angel Capital - Analyst   [106]
------------------------------
 Yes.

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [107]
------------------------------
 So there, we will pick up in this particular quarter. But also, they are now producing concentrates. And we will -- those concentrates, those sales will go right out and will not be pelletized. And we feel pretty good that they are going to pick it up.

------------------------------
 William Horn,  First Angel Capital - Analyst   [108]
------------------------------
 Okay. But my clarification was more towards Rene's comment that the expectation should be consistent with what we saw in Q2. But, in reality, it should be a higher number based on Cliffs production?

------------------------------
 Rene Randall,  MFC Industrial Ltd. - VP   [109]
------------------------------
 I don't think I said that. I was talking about the price. I wasn't talking any volume.

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [110]
------------------------------
 But Bill, you're right. Q2 is nothing to do -- is Q2 going forward, I will be very upset (laughter). You're right, you're right. It is completely right.

------------------------------
 William Horn,  First Angel Capital - Analyst   [111]
------------------------------
 Thank you for clarifying that. I certainly don't want to beat a dead horse too much, but going back to the whole margin question. You state in your release that margins are improving, but they are not yet at acceptable levels. Cutting through everything, what are -- I know you can't -- you told Graham that you can't predict where margins are going or what they will be. But what is an acceptable level for you? You say it's not at that acceptable level, so what is that acceptable level?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [112]
------------------------------
 I should say there'll never be an acceptable level, right? In reality. And what our competitors have is -- I don't think they have -- they're at acceptable levels either. We have room definitely to improve, and we know we have substantial room to improve with the freight. You know, we are chartering, but we are not filling up the ships the way it should be done. And so this -- it's amazing, Bill, the amount of saving on freight. It is substantial to us. And I can tell you that we can improve, and that's a major focus for us.

------------------------------
 William Horn,  First Angel Capital - Analyst   [113]
------------------------------
 So you're putting a lot of pressure on your logistics department, aren't you?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [114]
------------------------------
 Yes, for sure. (laughter) Right, right. Why don't you buy a couple of ships, Bill, and we'll be your best client?

------------------------------
 William Horn,  First Angel Capital - Analyst   [115]
------------------------------
 We can talk off-line about that. In the release, you speak about the commodities trading, and you give a nice overview of the German Pellets company and their association with MFC. What percentage of revenues does your wood commodity business make up?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [116]
------------------------------
 I can't give you the percentage, but I can say to you it is substantially -- it has picked up substantially over the years. And Mr. Leibold has become a very good client. And we anticipate, you know -- we would like to do his business in America, and he will become a bigger client. And we congratulate him.

------------------------------
 William Horn,  First Angel Capital - Analyst   [117]
------------------------------
 Is he the primary wood customer? Or, I mean, is your wood business broader than just German Pellets?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [118]
------------------------------
 It's broader than just German Pellets.

------------------------------
 William Horn,  First Angel Capital - Analyst   [119]
------------------------------
 Okay. Can you get into some specifics about other commodities? I mean, what are -- if you can't really -- can you give us an idea of what commodities are your biggest percentage of revenues, and give us an idea as to where the commodities business is focused right at the moment?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [120]
------------------------------
 You know, we do just-in-time deliveries for some of the major companies around the world. So revenues are relevant, but margins is what counts. And that's profitable business. You know, I think what's more relevant -- maybe what we should be doing, Bill, is trying to give information out on margins by different product. I think that would be helpful and I think we -- (inaudible- multiple speakers)

------------------------------
 William Horn,  First Angel Capital - Analyst   [121]
------------------------------
 I think shareholders would certainly welcome the transparency on a commodities basis. So I would certainly be pleased with seeing more transparency on each of the commodity product levels.

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [122]
------------------------------
 I think that's a good idea, and I think we can do -- we'll work on that.

------------------------------
 William Horn,  First Angel Capital - Analyst   [123]
------------------------------
 Okay. Getting back to Mazeppa for a second. In your release, you were talking about this midstream project requiring an investment of $220 million. And you listed the different components -- the different initiatives of this expansion project. Last quarter -- or excuse me, Q1, you reported that this investment was going to be $360 million. Can you give us an idea as to what changed there? If I look at the initiatives, they are identical from each of the earnings releases. But you just dropped the investment by $140 million. I'm just trying to understand where the difference is.

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [124]
------------------------------
 You know, Bill, it's kind of ironic. You know, the turbines and some of the costs have come down so substantially. And I think it's come down because they don't have orders out there. People have found ways to reduce costs of gathering gas for other people. So that has saved us a substantial amount of money. But it's predominantly in the equipment side and in the infrastructure side. And really nothing has changed outside of that.

 I guess you could say, how come your numbers are so wildly different? I'm happy for it, but I think that's a good number.

------------------------------
 William Horn,  First Angel Capital - Analyst   [125]
------------------------------
 Okay, that helps. You have also talked about this joint partner -- joint venture partner with Mazeppa only taking a small part. I think you told Graham, when you were talking about the timing, that the Mazeppa had Phase I, which may be mid-next year; Phase II would be, say, two years out. What part of the project are you looking to joint venture -- to participate in, the Phase I or the longer-term Phase II?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [126]
------------------------------
 Longer-term.

------------------------------
 William Horn,  First Angel Capital - Analyst   [127]
------------------------------
 Okay. And can you give an idea of what aspect that would be within the expansion project?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [128]
------------------------------
 I don't want to do it until he's signed up.

------------------------------
 William Horn,  First Angel Capital - Analyst   [129]
------------------------------
 Is this still moving forward on the letter of intent that was executed just before the end -- or just before the previous conference call?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [130]
------------------------------
 No, because it's changed, right? There, we were looking at an equal partnership, and we don't need it. You know, one thing to think about with Mazeppa is, you have an infrastructure there. You have a quality plant there. And if we do the financing with some of the assistance we've got in the past, people have to pay for that, right? I'm not going to give it away free. And I think that way we've gone through the decision curve, initially, we felt maybe these people or other people could bring us some assistance in making the project (inaudible).

------------------------------
 William Horn,  First Angel Capital - Analyst   [131]
------------------------------
 But this partner that would take a smaller piece, is it the same partner that you had the LOI with?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [132]
------------------------------
 No, it's a different partner.

------------------------------
 William Horn,  First Angel Capital - Analyst   [133]
------------------------------
 Okay. Just one quick question on Compton. I mean, looking at the metrics for your oil and gas production. In Q1, you had operating cost of $9.86. They rose to $12.81 for Q2. Significant increase. Can you provide some color as to where or what was attributing that increase to?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [134]
------------------------------
 Bill, you know, let us get back to you on that because I don't see those numbers.

------------------------------
 William Horn,  First Angel Capital - Analyst   [135]
------------------------------
 Okay.

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [136]
------------------------------
 Let me get back to you on that.

------------------------------
 William Horn,  First Angel Capital - Analyst   [137]
------------------------------
 Okay, fair enough. Just one other question and I'll get back in the queue. You had indicated on the previous call that you had identified a COO internally, and that this quarter that you were -- you had announced that hiring. Where does that stand? (Inaudible) saw an announcement of you adding a new Director to the Board, but there certainly wasn't any announcement on the COO position.

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [138]
------------------------------
 We could have announced a COO, but we didn't. And we will in the next release. That's on board now.

------------------------------
 William Horn,  First Angel Capital - Analyst   [139]
------------------------------
 The person is on board?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [140]
------------------------------
 Yes.

------------------------------
 William Horn,  First Angel Capital - Analyst   [141]
------------------------------
 And sitting in the COO position?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [142]
------------------------------
 Yes.

------------------------------
 William Horn,  First Angel Capital - Analyst   [143]
------------------------------
 Okay, thank you. I'll get back in the queue.

------------------------------
Operator   [144]
------------------------------
 George Burmann, JP Turner.

------------------------------
 George Burmann,  JP Turner - Analyst   [145]
------------------------------
 Got a couple of quick questions. It looks like you've performed a major feat in the African nation there on the Kasese Cobalt Company and the hydroelectric plant. That -- according to your essay here, it's all back on track now, yes?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [146]
------------------------------
 Yes. We are very pleased. We're very, lucky, George, we've had some very good management there.

------------------------------
 George Burmann,  JP Turner - Analyst   [147]
------------------------------
 Good. And that will -- we own that plant 100%, and that will add to revenues through the sale of electricity now?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [148]
------------------------------
 Well, actually, George, we own 75% of the company that owns the plant. But that company owes us around $50 million. So from a business perspective, we own, commercially, 100%.

------------------------------
 George Burmann,  JP Turner - Analyst   [149]
------------------------------
 Okay. The total production from the Canadian assets, oil and natural gas liquids, that's 1871 equivalent barrels of oil per day, yes?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [150]
------------------------------
 Yes.

------------------------------
 George Burmann,  JP Turner - Analyst   [151]
------------------------------
 Is any of that hedged?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [152]
------------------------------
 We have a hedging program and, at June 30, we were not hedged. During June, we were hedged. And we have a specific policy we use for hedging. As you know, natural gas today is down in value, and we are not going to hedge at these prices.

------------------------------
 George Burmann,  JP Turner - Analyst   [153]
------------------------------
 Yes, and oil, at the same time, is at all time highs?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [154]
------------------------------
 Right, right (laughter).

------------------------------
 George Burmann,  JP Turner - Analyst   [155]
------------------------------
 All time highs. In your current assets, you also show assets held for sale of $106 million. Any update on when those sales may occur? You had alluded to that last quarter that you might sell some things off.

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [156]
------------------------------
 Yes, we are in discussion now. And I'm still fairly optimistic that we are going to achieve something before the end of the year. So it's in process, I guess you would say, George.

------------------------------
 George Burmann,  JP Turner - Analyst   [157]
------------------------------
 Okay. Then, talking about your company and your stock, it seems to me that for some reason you are, as a corporation -- public company, awfully secretive about all the things that are going on. And where many, many public companies showcase all of their achievements in sometimes major ways, even though there's not much behind it, you kind of almost purposely keep a very low profile. With a book value of $11.90 -- the stock now basically trading at a little over $2.00 below that, $3.00 almost below it, have you considered be using some of your cash available, of which you have ample of, to initiate a stock buyback program to reduce the shares outstanding?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [158]
------------------------------
 We've been through it many times. And I guess what we are saying, we want to finish this program, which we are involved now. We firmly believe that we can finish building out this platform, as we have the tools. And it will be foolish at this point to look to restructure our capital. At some point, we should, but not at this particular period in time.

 But I should say one thing also, George. If today was a day to restructure the capital, I firmly believe you get -- you make the money out of restructuring for all the shareholders by doing it on a substantial way. Not a small buyback, but by buying a substantial amount of the stock and recapitalize it that way. And I think that's where you get the value.

------------------------------
 George Burmann,  JP Turner - Analyst   [159]
------------------------------
 Agreed, agreed. And no one in MFC Industrial's management team itself is in ownership of the German Pellet company?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [160]
------------------------------
 Correct.

------------------------------
 George Burmann,  JP Turner - Analyst   [161]
------------------------------
 It's a completely third-party entity. Is there a chance to participate with these guys? I just returned from Germany, and I know that the pellets are very, very big in Europe as a production for heat. That looks like a very strong business.

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [162]
------------------------------
 It is a strong business. And we are participating on a commercial basis, not on a ownership basis.

------------------------------
 George Burmann,  JP Turner - Analyst   [163]
------------------------------
 The way you describe it, you have a very good relationship. And for all I know, there might be a possibility to maybe even joint venture the fabrication or facilities they are looking to build here in the United States.

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [164]
------------------------------
 We've discussed all aspects of the business. We're not ruling anything out as we go forward. You know, these guys are growing very rapidly, and there's other parts of the world as well, which we're looking and talking to them about.

------------------------------
 George Burmann,  JP Turner - Analyst   [165]
------------------------------
 Yes, yes. Last but not least. A lot was talked about in this conference call about your shipping costs, etcetera. I happen to know that prices for oceangoing vessels, OBOs, etcetera, are at multi-year lows at the time. Would that possibly be a thought for you guys to own one of the other cargo ship?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [166]
------------------------------
 No. I'd just as soon charter than let somebody else take the pleasure of that depreciation or the merge cost. Because, you know, it takes an entirely different talent level, doesn't it? And I know you've been around shipping a long time.

------------------------------
 George Burmann,  JP Turner - Analyst   [167]
------------------------------
 Okay, well good. We'll stay tuned and look for further news.

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [168]
------------------------------
 Thanks very much, George.

------------------------------
Operator   [169]
------------------------------
 Joe Pratt, Wells Fargo Advisors.

------------------------------
 Joe Pratt,  Wells Fargo Advisors - Analyst   [170]
------------------------------
 My question was answered.

------------------------------
Operator   [171]
------------------------------
 Graham Tanaka, Tanaka Capital.

------------------------------
 Graham Tanaka,  Tanaka Capital - Analyst   [172]
------------------------------
 Just to reiterate what we just said about disclosure. And Michael, you know, we've discussed this in the past, you've diversified quite a bit. I think it would be helpful just get a breakdown of the commodities, you know, percent of which commodities. That'd be helpful. I know margins will take more time to do. But just getting back to Compton, what kind of -- what are the revenues and profits of Compton in the first and second quarter? And what could that become once you do Phase I and Phase II of Mazeppa, etcetera?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [173]
------------------------------
 Graham, we don't break out those revenues. But I can tell you that the depletion numbers so you can get a feeling there. And I think if you take the tables, you can get a feeling of the gross revenues and expenses. So I think you can put it together, but we don't put it together ourselves. Going forward, it's difficult, Graham, to give you the numbers at the time because we can't -- it's always got to do with the price of the commodity, right? And so what happens with natural gas? Right now, we are at a low period for natural gas. And it depends on what you are -- how you see it. I can say to you is that, on the midstream operation, that's an entirely different business. It relates to natural gas, but it's really a process. And the returns there are quite handsome. Your goal on that business for return is 20%. And it all depends upon volume, of course. But that's a goal, so that's quite a nice business.

------------------------------
 Graham Tanaka,  Tanaka Capital - Analyst   [174]
------------------------------
 So, so just to size the midstream business, you are talking -- that $220 million number, was that all for the midstream that you're talking about, so that we can say, okay if you invest $220 million, you should get $40 million something return on that?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [175]
------------------------------
 So Graham, I think if you said you should also know that the $220 million is new facilities, not including our existing facilities. So let's just round some numbers for moment. You should put on there another $50 million or $60 million of existing facilities.

------------------------------
 Graham Tanaka,  Tanaka Capital - Analyst   [176]
------------------------------
 So the existing facilities might be worth $50 million to $60 million of assets?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [177]
------------------------------
 Correct. And they are in operation today, processing sweet-and-sour gas. And now the attitude is increase that to produce electricity and start to upgrade those facilities to produce other products to generate continuous revenues from processing.

------------------------------
 Graham Tanaka,  Tanaka Capital - Analyst   [178]
------------------------------
 So to scale this, this shows proportionally that this is a considerably larger, literally four times the size of the existing asset. Or were you talking about historic assets are now worth [more]? Is that $50 million to $60 million replacement cost, or is that a historical cost?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [179]
------------------------------
 Historical cost.

------------------------------
 Graham Tanaka,  Tanaka Capital - Analyst   [180]
------------------------------
 So today that might be worth what?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [181]
------------------------------
 It's hard to say, Graham. But really what it's worth is what revenues we can get off of it, right? And right now, the industry is -- these products work, generally, in this industry at this time. And so we want to take advantage of it.

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 Graham Tanaka,  Tanaka Capital - Analyst   [182]
------------------------------
 Okay. So I'm just trying to get maybe -- I am trying to get in a backwards way the revenue contribution from this new investment of $220 million. And if you invest $220 million, what kind of revenues might you get since it's a processing business, it's less subject to the volatility of prices? Are we talking about revenues equal to the assets invested, or two times, or 1.5 times? What kind of range?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [183]
------------------------------
 Graham, I can't -- we want to make that all at one time to the people. And we haven't made that public disclosure at this point particular. All I can say to you is the goal, which we have said publicly is 20% return on capital. And that is what we would like it to be.

------------------------------
 Graham Tanaka,  Tanaka Capital - Analyst   [184]
------------------------------
 And that's in income, or pre-tax?

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [185]
------------------------------
 That will be pre-tax.

------------------------------
 Graham Tanaka,  Tanaka Capital - Analyst   [186]
------------------------------
 Thank you very much. Good luck.

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [187]
------------------------------
 Good, Graham. Thanks.

------------------------------
Operator   [188]
------------------------------
 William Warren, Horn, First Angel Capital.

------------------------------
 William Horn,  First Angel Capital - Analyst   [189]
------------------------------
 I just had one quick follow-up question. You indicated in the release that earnings were impacted for three main reasons. One of them we haven't talked to was the FX loss. It looks think there was probably about a $3.2 million FX loss for Q2. Can you give us a little more insight as to what occurred there? And what currencies were involved?

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [190]
------------------------------
 Will, the US had to be involved. I don't know which what was it (multiple speakers). Okay, the US dollar was up, Bill, and so obviously some asset got sold that was euro denominated?

------------------------------
 Rene Randall,  MFC Industrial Ltd. - VP   [191]
------------------------------
 (inaudible - mic inaccessible)

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [192]
------------------------------
 Financial instruments -- it was strictly financial instruments, not products.

------------------------------
 William Horn,  First Angel Capital - Analyst   [193]
------------------------------
 Okay.

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [194]
------------------------------
 But predominantly euro?

------------------------------
 Rene Randall,  MFC Industrial Ltd. - VP   [195]
------------------------------
 (inaudible - mic inaccessible)

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [196]
------------------------------
 Predominantly euro. Yes, euro US is the guilty one.

------------------------------
 Rene Randall,  MFC Industrial Ltd. - VP   [197]
------------------------------
 (inaudible - mic inaccessible)

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 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [198]
------------------------------
 Right, and Canadian dollars to a lesser degree.

------------------------------
 William Horn,  First Angel Capital - Analyst   [199]
------------------------------
 Okay, thank you, Michael.

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [200]
------------------------------
 Great.

------------------------------
Operator   [201]
------------------------------
 I would now like to turn the call over to Mr. Michael Smith for closing remarks.

------------------------------
 Michael Smith,  MFC Industrial Ltd. - Chairman, President, and CEO   [202]
------------------------------
 We sincerely thank you very much for attending the call today. And please do not hesitate to give Randy or myself a question -- any questions you have. And please do it by phone or by email. We would like that. Thank you very much.

------------------------------
Operator   [203]
------------------------------
 Thank you for joining today's conference. This concludes the presentation, you may now disconnect, and good day.






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