Q3 2013 MFC Industrial Ltd Earnings Conference Call

Nov 14, 2013 AM EST
MFCB - Mfc Bancorp Ltd
Q3 2013 MFC Industrial Ltd Earnings Conference Call
Nov 14, 2013 / 03:00PM GMT 

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Corporate Participants
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   *  Kevin McGrath
      Cameron Associates - IR
   *  Michael Smith
      MFC Industrial Ltd - Chairman & CEO

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Conference Call Participants
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   *  Sean Sweeney
      Milwaukee Private Wealth Management - Analyst
   *  Graham Tanaka
      Tanaka Capital Management, Inc. - Analyst
   *  Bill Horn
      First Angel Capital - Analyst
   *  Sven Karlen
      Wells Fargo Securities - Analyst
   *  David Minkoff
      DCM Asset Management - Analyst
   *  George Berman
      JP Turner - Analyst
   *  Bernie Harris
      BJ Harris - 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 third-quarter 2013 MFC Industrial Ltd. earnings conference call. My name is Lacey and I'll be your coordinator for today.

 (Operator Instructions)

 As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Kevin McGrath of Cameron Associates. Please proceed.

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 Kevin McGrath,  Cameron Associates - IR   [2]
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 Thank you, Lacey, and good morning, everyone. We appreciate your interest in joining us on MFC's conference call and webcast to discuss financial results for the three- and nine-month period ended September 30, 2013.

 On the call with me today are Michael Smith, Chairman and CEO, and Rene Randall, Vice President. The Company will make a brief 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 website, Webcast section, to access the webcast.

 The webcast will posted at mfcindustrial.com for replay approximately two hours following the end of this call. 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 reflects 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 our Form 6-K with the SEC. That said, 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 & CEO   [3]
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 Thank you very much. It's Michael Smith, the Chairman of the Company.

 I would like to thank all shareholders and stakeholders for listening to our report today. In addition, I will summarize the pertinent information which you're not so clearly seeing in the press release and point out items which are relevant for further discussion and I encourage everybody who has some questions to ask them at the end.

 One of the most important things to start out with is that we've made some positive strides but still we have lots of work to do in the commodity business. The appointment of our COO for commodity business, Ernest Alders, he has integrated it and that's working but we still have more to do there and definitely we have more to do there on working on the margins.

 Earnings before interest, taxes, depreciation for the period was $54.6 million. If you add a one-time cost for the flood in Alberta, which I'll discuss later, it would have been $62 million. It also would have, to a degree helped our net earnings, but not substantially, as a lot of that is depletion and I will get into some of the finer numbers a little later.

 Net income for the period was $22.2 million or $0.35. Actual depletion and amortization and depreciation was $18.4 million for the nine months, or $0.29. And if you do add back the Alberta issue, it would have been up to $26 million, and $0.41 a share in the depletion, [depreciation], and amortization area.

 One of the things you should look at carefully and always look when you look at our Company, especially as we're going forward, looking to increase our revenues and increase our margins, is our GA costs. And our GA costs for this particular nine-month period was $46.3 million, versus the same period in 2012 of $32.4 million.

 This number will increase and it's important that it does. If it goes down, I believe we're doing something very, very wrong.

 One of the things we have tried to do in the press release, but also in our reports in the 6-K and our letter to you, is to provide some tables, and these tables, we strive to provide the stakeholders and shareholders with details, which we believe is helpful. We invite your comments and suggestions on what other ones we could put in there.

 We are more than happy to try. Transparency is a very major and important thing. But please, when you make those suggestions, bearing in mind that we are a competitive business, and sometimes we are unable to do that.

 At the period ending September 30, our balance sheet is okay; our ratios are acceptable; book value is $735 million; and book value per share, $11.76; we had about $300 million in cash. So I'm not dissatisfied there. I feel that our integrity of our balance sheet is still very, very good.

 A major issue for us going forward is always liquidity and utilizing our balance sheet is important to grow without diluting our shareholders' equity. So liquidity factor is important and on the understanding that we cannot dilute but we can grow, and also not hurt our ratios. I'll go into that a little bit later but that is our major goal and has been for a long time.

 Our long-term debt-to-equity is also very important; it's probably the key ratio to that concept right now it's at 0.20. We have credit facilities of just under $0.5 billion, plus a hedging line of approximately $100 million. Of the $0.5 billion in credit facilities, $220 million approximately are what we would call blank facilities or unsecured facilities which we can use without posting any collateral. At the same time, we have some term debt and we have the ability we feel to take on some more term debt if the situation was correct in the future.

 Let me touch on what has happened in Alberta, Canada in June with the dramatic flood which occurred and how it affected our Company. We produce sour gas and one of our sour gas lines became exposed with this tremendous flood. This tremendous flood was the largest one in Canada's memory and it was a disaster for the people of Calgary but also for the surrounding areas.

 With our gas lines going into our main processing plant in Mazeppa, one of them was exposed under a river by erosion of the depth of the river. This, of course, caused our incident management team to go into active to solve this problem immediately and to advise the people in the area and to put in a plan which they had developed and has been approved by the government because we're talking about here a very serious environmental but also a serious hazard as we're talking explosive potential. I congratulate that team; they managed to [tail] and shut in the lines without the lines being a major problem.

 We didn't have enough gas after that to continue our operation of the plant so we had to shut down. But we now came back on stream at the end of September. We've quantified our damages and we've made our claims with our insurance companies.

 Our claim is in the area of CAD9 million; CAD7.5 million is for loss of net revenues. The net revenues will be interesting because obviously that will occur in the future, when we can quantify and see acceptance of the insurance companies. In the meantime, the other operations with our midstream is now back in operation and is proceeding.

 During this period, we also entered into an agreement with a very good operator in what we call the Niton area of Alberta in Canada where we agreed with them, where they would drill CAD50 million worth of wells, at least that, projected at 12 wells. These will be horizontal wells and they'll pay 100% of the cost of the drilling and the completion of each well at their sole risk. They're very experienced at this business and I would sooner have them, what we would say, derisk our property and I wish them great success with that.

 The economics of this, after each well is drilled we can look back and see what they've done for the period of 90 days and if we like it and encourage it, we can then purchase, at their cost, 30% of each well. We purchase at 25% of the actual cost so we get a discount to their actual cost.

 Or if we feel uncomfortable or we feel that the price of the commodity will not be what it should be over a period of time, we can elect to take a gross royalty on the product instead. Gross royalties is something I understand quite well and as the certainty factor is very high but also owning part of a well with a good operator might also be encouraging but here's a case where we can just look at it and see and then decide and so the risk is passed on.

 One thing very nice, they've agreed with us where we can process through our processing plant all the gas found in this field. To us, that's a very important thing, utilization of our midstream assets is something we want to develop very much in the future.

 We touched on very briefly last time we spoke about our marginal wells. We have around 800 marginal wells and we are now implementing a plan and so we've separated those marginal wells legally from our present operation and in the present, the staffing of our group in Canada to go into the marginal well business, entirely different mentality, operation from our existing business in Canada, and I'm quite encouraged with this because I see that we can obtain other business from other companies and we can see some good growth there in a different area of the industry. And as we go forward with that, we'll keep you informed.

 To give you a feeling of the results of the gas business, the natural gas pricing up until September 30 averaged CAD3.34 per 1,000 Mcf of gas. That was down from the period of June 30 where we were averaging CAD3.57 per 1,000 cubic feet of gas.

 Of course this is the summer period where gas [is at low]. We find that gas prices usually go up in the winter if it's a cold winter and we are very much hoping that especially the northeast of the United States has freezingly cold winter. This will help us substantially.

 So when I look at the CAD3.34, this is substantially above our cash cost and slightly below our cost -- or book cost -- and so depletion with our cash cost, we're not covering at CAD3.34 but it's not so bad. We have to see what we average for the year. If we get lucky and we do see some prices spike, as I said to you before, we have $100 million credit facility, a hedging line available to us, so we can take advantage and lock in prices for the next couple of years.

 I could just go back now and just touch a little bit about the commodity business. We see further growth here but we see growth in two areas -- in the product line, but also through acquisitions. And integration with our new CEO has pretty much occurred satisfactorily at this point but our margins have not.

 So we have a lot of work to do on margins and I see greater top-line number and we must have greater top line number to get those margins. I see that occurring through products but I also see it occurring through acquisitions.

 Changing the subject to the Wabush mine and the royalty we have in Canada, recently I met with the operators of the Wabush mine. We haven't met for approximately 11 or 12 years. Management [is close resources] and they have a management change.

 It's very good to after 11 or 12 years to meet and go through different stakeholders' positions and it was very refreshing and we aim to work hard with this to make this mine as productive as possible for all the stakeholders and we're committed to that and I believe with this new management group, they're also committed. For the last 11 or 12 years, we've just been in litigation with them and the only people who have been happy with that, of course, has been the lawyers.

 The Wabush mine itself has changed over from producing pellets and selling them in the market to producing concentrate. That has successfully occurred. And in addition, if you can see from the table on page 8 of the press release or in the [president's data], you'll see that the production also has come up.

 The last three or four quarters I've discussed with you, I've been disappointed always with Wabush and this is the first time in so long time that I'm not happy, but I am much more relaxed and look forward to creating something much better here with them. And we'll work very hard going forward.

 The reference to the Pea Ridge property of ours is progressing. I was also down there last week and we will bring you up-to-date when something is material. We are limited, as you know, under SEC and Canadian regulations to say something to you unless we can certify it with some specific reports which they govern but it's continuing and we'll let you know if there's anything material.

 A couple of accounting notes, which are relevant. Pursuant to IFRS 3, we thought it was prudent and revisited the bargain purchase, which we must do after one year. And we've adjusted that through a series of transactions where we felt the timing wasn't correct on some of the assets, have adjusted that down to a retained earnings revised of $406 million.

 In addition, we have reviewed and restructured our decommissioning obligations. Decommissioning obligations are our long-term obligations for the reclamation and mediation of specific natural gas properties. And we have reduced that from $136 million at December 31, 2012, to $106 million, which is approximately a $30 million change.

 None of this has an effect -- neither of these issues have an effect on the profit and loss statement. They all have an effect just on the balance sheet and the liabilities for the decommissioning gets reduced and subsequently the corresponding [entries] to the asset.

 The next item I'd just like to touch on is that the search for a permanent CEO is underway still. We have interviewed several candidates.

 We're not stopping. We're committed to that but we have not finished that at this particular period of time.

 We recently put in a shareholders' rights plan. We feel the shareholders rights' plan is fair at this point to allow each shareholder to have the same rights while we go through the period of having our shareholders assess where we're going for the future and making sure that we're all on the same level playing field.

 There was two important things I'd like to address to you today. The first thing is we need to get our top line up in the commodity side, which I feel we're doing, and we need to improve our margins as they are not an acceptable level.

 That's number one. That's the most important direction that we have for our people and for us -- of course, for myself.

 The other is that we have do some foresight on growing and so we aim to grow through the expansion and our acquisition. The policy which we have clearly identified is that we wish to grow without issuing shares. We wish to grow without dilution to our shareholders.

 We also insist that we keep our balance sheet and our ratios in very good form. If we don't do that, our future will be very limited and we'll have to issue shares in the future. So it's important that any project we do going forward, we create a situation and know upfront that we're not going to be hurt ratio-wise and we will not create any dilution at that time or in the future.

 We're committed to that policy. The projects we did last year in the fourth quarter last year; we did in the fourth quarter of last year, three projects, we will continue with that in the future.

 So I thank you. That's all I have to say from a business point of view and I very much welcome your questions.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions)

 Our first question will come from the line of Sean Sweeney with Milwaukee Private Wealth Management. Please proceed.

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 Sean Sweeney,  Milwaukee Private Wealth Management - Analyst   [2]
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 Good morning. Thanks for your time today.

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [3]
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 Good morning.

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 Sean Sweeney,  Milwaukee Private Wealth Management - Analyst   [4]
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 Can you quantify the key ratio long-term debt-to-equity and what the acceptable high and low range on that would be?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [5]
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 Right now 0.20, right? So the high and low range, we have some internal projections and I'd sooner just not go into that.

 One thing we do have, we do have the ability to leverage more long-term debt. We've looked at that, discussed it, but it is a competitive situation and I'd just not in the public arena go through where we would plan to go as far as the amount.

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 Sean Sweeney,  Milwaukee Private Wealth Management - Analyst   [6]
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 All right. And second, final question, with respect to your natural gas gathering strategy and the marginal wells that you indicated, approximately 800 in total, your release suggested that you may be interested in improving that business by acquiring other marginal wells from local producers. I'm curious why you elected to separate that legally and what that might imply going forward and how this becomes a good or additive/accretive business to you in the event that you are successful with your strategy and, again, with some special emphasis on the legal separation?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [7]
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 We just see it in Canada -- the stripper well business is really not a developed business so really that's what takes us or draws us first of all to it. We think mentally there is a huge difference as far as the operator is concerned.

 Your operations are done more on a cash flow basis and are done without big company mentality of drilling wells. It's really here -- it's recovery and costs.

 We see several operators and several companies who have surrounding properties to us and other places who would like us to be part of what they're doing and they know that if we take this philosophy forward, we can reduce costs and we can see where we can do that and the legal separation of this has occurred and should it be an independent Company, well for sure it's going to be independently managed and independently run and nothing to do with our [on] operations.

 I see some good growth because I see need in Canada for people to be looking at what I call shallow wells or not very attractive wells to the average person. Always in our lives, we have looked at the negative things, and I find that the stripper wells and the low-volume wells are quite negatively reviewed and quite often come with a lot of reclamation liability and that's also an area which we have a high level of interest.

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 Sean Sweeney,  Milwaukee Private Wealth Management - Analyst   [8]
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 Does this then tangentially improve your midstream business or is there economic merit alone to this marginal well business that would make you want to commit additional capital there?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [9]
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 There is economic benefit alone that makes it quite attractive.

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 Sean Sweeney,  Milwaukee Private Wealth Management - Analyst   [10]
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 All right. Well, good. Thank you.

 I appreciate it. Good luck.

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [11]
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 Thanks.

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Operator   [12]
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 And our next question will come from the line of Graham Tanaka with Tanaka Capital. Please proceed.

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 Graham Tanaka,  Tanaka Capital Management, Inc. - Analyst   [13]
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 Michael, how are you?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [14]
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 Good morning, Graham.

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 Graham Tanaka,  Tanaka Capital Management, Inc. - Analyst   [15]
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 Hi. Just on the -- first of all, on just Mazeppa, what are your plans there? Where are you relative to where you want to be, and more importantly, what will that look like next year in terms of maybe revenue top line and profitability?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [16]
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 Next year is too soon, Graham. It's about a two-year build out, maybe two and a half years, depends upon what particular part of it.

 We have ordered equipment. We're waiting for some tie-ins from other people. So it's in progress but it's not a situation where you get revenues immediately.

 You've got to say it's at least two years and I find when my people say two years, it's really two and a half years. That's even, in reality, when you're pushing them and they're all motivated but delays and permits never come on time. But it's an interesting business and it just complements what we're doing but it's just another one of the pieces of rationalizing the natural gas business.

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 Graham Tanaka,  Tanaka Capital Management, Inc. - Analyst   [17]
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 And eventually what size will that become, whether it's two and a half or two or three years out? How large is that entity going to be in terms of its operation?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [18]
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 If you said what will be the total footings, let's just say, net of current assets, you're talking around [CAD220 million].

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 Graham Tanaka,  Tanaka Capital Management, Inc. - Analyst   [19]
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 CAD220 million top-line revenues for the--?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [20]
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 CAD220 million in total assets.

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 Graham Tanaka,  Tanaka Capital Management, Inc. - Analyst   [21]
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 Total assets? Okay.

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [22]
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 Right.

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 Graham Tanaka,  Tanaka Capital Management, Inc. - Analyst   [23]
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 And then so there will produce processing revenues of about how much?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [24]
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 Well, let's just say our projections for EBITDA would be 20%.

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Operator   [25]
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 And our next question will come from the line of Bill Horn with First Angel Capital. Please proceed.

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 Bill Horn,  First Angel Capital - Analyst   [26]
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 Good morning, Michael.

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [27]
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 Hello, Bill.

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 Bill Horn,  First Angel Capital - Analyst   [28]
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 Just on your loss of gas production out of the Calgary region, you indicate that it was CAD7.5 million in income. Can you tell us what the production loss was?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [29]
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 Yes, but I don't have it here, Bill. But that's not income, Bill, that's gross revenues that we have paid--

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 Bill Horn,  First Angel Capital - Analyst   [30]
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 I realize that, Michael. I'm asking for the production amount in Mcf?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [31]
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 I don't have that.

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 Bill Horn,  First Angel Capital - Analyst   [32]
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 Or barrels equivalents?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [33]
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 I can send that to you.

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 Bill Horn,  First Angel Capital - Analyst   [34]
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 Okay, that would be great. On your balance sheet, you've reclassified about $34 million worth of investment property to real estate held for sale. Is that the SWA investment properties, the German commercial real estate properties, can you comment on that?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [35]
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 We have some properties which we are now in the process of selling, and as we're in the process of selling, we have reassigned them to current assets and there is some of those properties but not all those properties.

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 Bill Horn,  First Angel Capital - Analyst   [36]
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 Some of the properties that were related to the SWA REIT acquisition?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [37]
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 Yes, but that was -- some of those properties don't exist anymore.

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 Bill Horn,  First Angel Capital - Analyst   [38]
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 No. Okay.

 Can we look at the income -- or excuse me, the equity side of the balance sheet for a second. You have a line item there for non-controlling interest that has decreased by about 60% in the nine months this year. Can you comment on what those interests are, why they're being written down, or what's happening to those interests?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [39]
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 We have just been eliminating some of the non-controlling interest as we have been going forward and that's a continuous plan which we will be doing on various companies which we don't own 100%.

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 Bill Horn,  First Angel Capital - Analyst   [40]
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 Eliminating, meaning selling or just writing off?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [41]
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 No, meaning purchasing. Eliminating is purchasing.

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 Bill Horn,  First Angel Capital - Analyst   [42]
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 Understand. The other component on the equity side is your other comprehensive income, which has fluctuated substantially in the nine months of this year. Can you comment on what are the main drivers of the adjustments there?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [43]
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 Predominantly currency, Bill.

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 Bill Horn,  First Angel Capital - Analyst   [44]
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 Okay. Just following up on Graham's comments about Mazeppa. In your release you talk about investigating an opportunity of developing a warehouse facility on the property.

 Is that part of a fractionation facility or are we talking something different there? Can you comment on what your strategy is there?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [45]
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 What we're looking to do is to create more value-added on the commodity side and with Mazeppa, it is uniquely located and it's the most important thing is not the location, is that it has rail. And with the rail, we can then use that as a distribution center.

 And that's what we're asking and looking to permit properly now. We have lots of excess property in this particular main processing plant, just outside of Calgary.

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 Bill Horn,  First Angel Capital - Analyst   [46]
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 Okay. You've mentioned on the call that you're still not satisfied with margins. On the previous call you mentioned that margins were adversely impacted by ACC's integration efforts.

 How has that integration with the ACC operations, how's it coming along? And are the margins improving in that end of the business?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [47]
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 Margins, Bill, we will never be satisfied. It's just we're not allowed to.

 But the ACC and the companies we have acquired to date, integration has occurred and it's proceeding and I feel margins are getting better. But still not good enough, right? So it is a main focus as I said; it's one of the main focuses we have going forward.

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 Bill Horn,  First Angel Capital - Analyst   [48]
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 Okay. Also on the last call, you had indicated that the power plant that you had acquired in Uganda was to come online in October. Is that online and is it producing?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [49]
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 It's online, producing, but not up to scale until January.

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 Bill Horn,  First Angel Capital - Analyst   [50]
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 So it's ramping now until January?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [51]
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 There are several legal issues that we have to wait for licenses for this. But I can tell you, we are receiving cash, which is the most important thing.

 I'm quite happy. Everything in Africa is working, which is a good thing to say, but doesn't normally happen so easily.

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 Bill Horn,  First Angel Capital - Analyst   [52]
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 Okay. You indicated earlier in the call that you were still searching for a CEO, but when you were describing the commodity business, you referenced Ernest Alders as the COO of the commodities business.

 On previous calls you had indicated that you had hired a COO for MFC. Is Ernest the COO for the Company or were you referencing just his position within the commodities business?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [53]
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 Ernest is the COO of MFC commodities. The confusion may lie in the word MFC. We call the commodities business MFC commodities.

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 Bill Horn,  First Angel Capital - Analyst   [54]
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 Okay, on the previous call you did indicate that you had hired a COO for the Company. Can you provide us details on who that hire is?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [55]
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 No, Bill, I just said to you, the COO is Ernest Alders of the commodity business called MFC.

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 Bill Horn,  First Angel Capital - Analyst   [56]
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 I realize, that Michael. I did hear you. But on previous calls you've also mentioned that you have hired a COO for MFC Industrial?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [57]
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 I'm sorry--

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 Bill Horn,  First Angel Capital - Analyst   [58]
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 That's not the case?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [59]
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 I'm sorry if there's some confusion there but that's not the case.

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 Bill Horn,  First Angel Capital - Analyst   [60]
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 Okay. Thank you, Michael. I'll get back in the queue.

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Operator   [61]
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 (Operator Instructions)

 And our next question will come from the line of Sven Karlen with Wells Fargo. Please proceed.

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 Sven Karlen,  Wells Fargo Securities - Analyst   [62]
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 Good morning, Michael.

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [63]
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 Good morning, Sven.

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 Sven Karlen,  Wells Fargo Securities - Analyst   [64]
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 The shareholders' rights offering or shareholders' rights that you've put in place, my historical experience is generally speaking, those plans are put in place for a reason and I look at -- I read it carefully and it seems to me the way the shareholder base at MIL is set up, there is only one shareholder that is disadvantaged with regard to that shareholders' rights plan, so it seems to me that all of the shareholders are not being treated equally and I'm -- generally those plans are put in place to deal with an activist dissident shareholder and my observation of this very large shareholder is that he's been much more of a partner than an adversary. So I don't understand the rational behind the shareholders' rights plan?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [65]
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 Our Board of Directors has made it clear that to be a public Company you need to have a float and the float is now less than 50% of our Company and we need to address that issue and we will. We're going to have a shareholders' meeting in about two months and we look forward at that time to address those issues.

 But for us to attract an institution to come in to be a shareholder is very difficult now. So in a couple of months we will address all those issues and we'll have clarity for you and for all of the shareholders.

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 Sven Karlen,  Wells Fargo Securities - Analyst   [66]
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 Thank you.

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Operator   [67]
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 And our next question will come from the line of David [Minkoff] with DCM Asset Management. Please proceed.

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 David Minkoff,  DCM Asset Management - Analyst   [68]
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 Good morning, Michael. How are you?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [69]
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 Good, thank you.

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 David Minkoff,  DCM Asset Management - Analyst   [70]
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 So as you indicated earlier, we have about $300 million in cash. I know you like sitting with large cash levels. It gives you options and it's probably comfortable for you.

 And our stock right now yields about 3%. It seems to me, you could take a small portion of that $300 million, say $15 million, using an arbitrary number, and that would double the dividend to an excellent dividend of 6% and what would happen probably is that stock would go to $10 in short order.

 And taking $15 million wouldn't hamper your plans or your acquisition thoughts or your comfort level, I would think. Why wouldn't you take $15 million, double the dividend and pay some [port] of that out to shareholders without harming the Company?

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 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [71]
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 David, I don't know if I have an objection at all to what you're saying. It's important that we keep our debt-to-equity low and reasonable if we're going to take this attitude of expansion without dilution. And that is really the most important thing.

 What you're saying about a dividend, if it's increased from 3% to 5% to 6% to whatever is something that we should look at and we will. We will. And as the year ends here, we'll be setting down a new dividend policy in the month of January and I will seriously discuss that.

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 David Minkoff,  DCM Asset Management - Analyst   [72]
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 Right. And then just one further add onto that. You're probably looking at the dividend as relates to cash flow and earnings currently, but with the huge hoard that you had, if you peeled a little off for a year or two and paid a little more than your earnings or cash flow, it wouldn't upset the apple cart and you'd be looking at a better stock.

 If the stock went from $8 to $10 and that's about where it would probably go with a $0.60 dividend, it's my guess, you could argue with that, for $15 million you raised the value of the Company by $120 million, 2 points on 60 million roughly. To me it seems like a no brainer?

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [73]
------------------------------
 David, your words are very wise and we will definitely think about that and address it with the Board.

------------------------------
 David Minkoff,  DCM Asset Management - Analyst   [74]
------------------------------
 Good. Thank you.

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [75]
------------------------------
 Thank you.

------------------------------
Operator   [76]
------------------------------
 And our next question will come from the line of [George Berman] with JP Turner. Please proceed.

------------------------------
 George Berman,  JP Turner - Analyst   [77]
------------------------------
 Good morning, gentlemen. Thank you for taking the call.

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [78]
------------------------------
 Good morning, George.

------------------------------
 George Berman,  JP Turner - Analyst   [79]
------------------------------
 Thanks very much for the quite detailed information. It looks to me, having been on a number of these calls, that you are a very careful and shrewd operator that always looks for the long-term possibilities of assets that you purchase at usually very depressed prices. Looking at your balance sheet and your finances, no one can argue that you're very well funded and have a lot of cash balances on hand.

 I think you would agree that today's interest rate environment is what some call a generational low and I'm wondering why, at a time like this, you would not evaluate possibly going in and locking in a very low interest rate for capital for a longer period of time. With the assets that you have, you could, for example, take the Cliffs royalty stream and make that as a security against, say, a bond offering, and with the cash on hand that you have, the EBITDA generation, you would be able to lock in for, say, 10, 15 years, a nice yield on a corporate bond offering, then use the funds, locked in at today's, say, 2%, 3%, 4% yield, to go what you do best -- it is find undervalued assets where you know your cost of capital right away.

 It would look to me that that is more adequate than having lots of unused credit lines laying around that you know when the rates go up, and they will go up, your cost of capital goes up. I'm wondering if that has been floated around as an idea possibly in this time and place because I don't think rates will stay this low for long and thereby lock in a capital flow that would be very well used.

 You could, as I said, buy assets or you might even pay a special dividend like some companies do when they buy back their stock against a fixed loan. Your thoughts?

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [80]
------------------------------
 No, I appreciate your words, George. A couple of things.

 December 31, 2012, we did borrow on a term basis of seven years about one (technical difficulty). So your words are, yes, term debt is important and when it's available at low rates you should take advantage of it as long as you can prudently have some purpose of it in a reasonable period of time and of course get a return in excess of your cost. And the cost for that term debt which we did December 31 of 2012 was 2.54% so it was reasonable.

 We have looked at doing additional term debt and we did the ones at December on an unsecured basis. We (technical difficulty) are looking at that seriously.

 But the second part on Wabush, one of the problems on Wabush, and the securitization of that cash flow is that we haven't got a firm pricing mechanism with Wabush as far as how much per ton. It's based upon a variable price but now the variable has changed to only having one price and it's not something which you should use or could use.

 Maybe it will be available to us after we've now finished our discussions with Wabush of how to increase the value of that asset for both the operator, the owner, and for us being the royalty holder, the stakeholders. And I'm open to that. We can look at that but it will take at least on Wabash -- it will take six, seven months for us to have a firmer understanding, even though their attitude is just excellent and I'm looking forward to working with them as we -- in the very near future.

------------------------------
 George Berman,  JP Turner - Analyst   [81]
------------------------------
 Great. Then one more question.

 Do you have any further updates on your Pea Ridge mine? A year ago it was welcomed with lots of potential.

 It seems like every quarter, the feasibility study is in the works, in the works, in the works, and now you've changed the general manager there. Is this something that you still feel has tremendous potential as you did a year ago to maybe open up us becoming either a royalty receiver for this mine or when will we see some revenues come out of this project?

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [82]
------------------------------
 There's two parts to the mine. There's the actual mine itself and then there's the tailings. We are spending our time working on the tailing at this particular point.

 The new general manager there is the man who used to run our operation in Uganda. He has many, many years of experience in tailing operations and he is generaling the project.

 What I can't say to you now is what the reserves are, the economic life is, I'm limited in what we can discuss on the project. All I can say is I was there last week and the project is going ahead.

 I have a great partner. The partner is perfect -- a local, successful company.

 But we're not finished and so I can't -- we're working at it but I can't give you -- I can't say anything optimistically and I can't say anything negatively because there isn't anything negatively and if there was we would have made that disclosure [while ahead]. We're not there. But it's not black in any way.

------------------------------
 George Berman,  JP Turner - Analyst   [83]
------------------------------
 Okay.

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [84]
------------------------------
 Sorry, I can't say more.

------------------------------
 George Berman,  JP Turner - Analyst   [85]
------------------------------
 And then if I could, one last question. About six months ago, you acquired two other companies -- I believe one was in Mexico and one was up in the New York -- to augment your commodities trading operations. How is that working out?

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [86]
------------------------------
 George, that's totally integrated now into our Group and it's going along fine. With Ernest Alders running that, being responsible for it, he has created communications and everybody's workings as a team and as a team we should get better margins.

 We're getting better top-line growth. We can see greater top-line growth and I'm quite happy with that at this point.

------------------------------
 George Berman,  JP Turner - Analyst   [87]
------------------------------
 Is that still hampered by high shipping costs or have you gotten it under control?

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [88]
------------------------------
 There's always high shipping costs when you don't ship enough in one ship. The key to that business, George, is still the integration and getting products into one shift so you become the dominant freighter supplier and we're getting better at that and--

------------------------------
 George Berman,  JP Turner - Analyst   [89]
------------------------------
 Do you need to increase your volumes?

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [90]
------------------------------
 Yes. You need to increase -- it's top line. I hate to say we need more top line, but we're getting there.

------------------------------
 George Berman,  JP Turner - Analyst   [91]
------------------------------
 Good. Thank you.

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [92]
------------------------------
 Thanks, George.

------------------------------
Operator   [93]
------------------------------
 (Operator Instructions)

 And our next question will come from the line of [Bernie Harris] with [BJ Harris]. Please proceed.

------------------------------
 Bernie Harris,  BJ Harris - Analyst   [94]
------------------------------
 Yes. Good morning.

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [95]
------------------------------
 Good morning.

------------------------------
 Bernie Harris,  BJ Harris - Analyst   [96]
------------------------------
 The gentleman just answered a few minutes ago about with the bonds and all. I have just a question I'm not that familiar with.

 I know you hear a lot of people looking in the United States to extend their loans because they know if things are going to go up. Is Canadian loans rate pretty similar to American?

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [97]
------------------------------
 Identical. Except pricing is a little different. We're talking now not the high-yield market, right?

------------------------------
 Bernie Harris,  BJ Harris - Analyst   [98]
------------------------------
 Yes, the bond market, yes?

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [99]
------------------------------
 Yes, I don't think Canada is any different. We are able to borrow cheaper, more reasonable in Europe, and if we have to borrow in Euro and do a swap we can do that.

 So it's more competitive, maybe it's more under-banked but more competitive in Europe for us. It seems to always be that way.

------------------------------
 Bernie Harris,  BJ Harris - Analyst   [100]
------------------------------
 You mentioned last year you borrowed at 2.7% or something like that. If you went to do it today, how much higher is it? Approximately?

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [101]
------------------------------
 I don't have that pricing. We borrowed in December 2.54% for seven years unsecured, for just $100 million in our currency.

 I don't think it's -- I can't say to you what it would be. The pricing, as you know, it's -- but I don't think it's so much different at this particular point.

------------------------------
 Bernie Harris,  BJ Harris - Analyst   [102]
------------------------------
 Because I tend to agree with the man. I can remember way back when utilities when they saw rates were so cheap although they didn't need the money they were doing it because they figured within two or three years it's going to be a lot more expensive?

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [103]
------------------------------
 It's not that I disagree with George at all. When money is available at reasonable prices and you don't take it, that's wrong. We just want to make sure that we're comfortable with that because we do have capacity to borrow term debt, that's for sure.

------------------------------
 Bernie Harris,  BJ Harris - Analyst   [104]
------------------------------
 I have a second question. Last year, you talked about getting more -- that you, I know, yourself, own a huge chunk of the stock, but a lot of investors want to see other people like the directors and all.

 Has any program been started for that? It was talked about last year?

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [105]
------------------------------
 The directors just have stock options and they have no ownership so there is no plan in that regard.

------------------------------
 Bernie Harris,  BJ Harris - Analyst   [106]
------------------------------
 Thank you.

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [107]
------------------------------
 Thanks.

------------------------------
Operator   [108]
------------------------------
 And our next question is a follow-up question from the line of Sean Sweeney with Milwaukee Private Wealth Management. Please proceed.

------------------------------
 Sean Sweeney,  Milwaukee Private Wealth Management - Analyst   [109]
------------------------------
 Yes, thank you again. Michael, I'm a little curious about, after an 11 to 12 year hiatus in speaking to the management team at Wabush, what prompted that conversation and what were you hoping to expect versus what you did -- or what did you expect to achieve versus what was actually achieved?

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [110]
------------------------------
 Two things. One, what prompted it was this change of senior management at Cliffs. The management of -- I believe has come out and said and let's talk to all stakeholders, lets not just arbitrate any financial dispute.

 Right? We've been in arbitration with them for years. We used to every year meet with them and discuss positives, negatives, for the property and then it stopped and it became adversarial.

 It's wonderful we have a management change. At least that management change is creating talk and they came to us on one of the arbitrations which was just on -- there's been several -- just on some costs. They made an offer of settlement.

 I was just about shocked to see an offer of settlement because usually they go the whole route, like right to the end. There's a major change underway [excess] and I'm encouraging it. I want to participate in it, as it's going to be good for MFC and will be good for them.

------------------------------
 Sean Sweeney,  Milwaukee Private Wealth Management - Analyst   [111]
------------------------------
 Yes. Great. I appreciate the added color.

 Second question, you were very judicious in your execution of your Mazeppa strategy and had referenced you're looking for the right JV partner, which apparently you found in Niton. I'm being mindful that Niton or a representative may be listening to this call.

 Can you describe a little bit about how you arrived at the terms surrounding the E&P development, which strikes me as being rather favorable to us as shareholders in terms of off-loading some of the known or unknown risks associated with the development. And any other comments you might make related to the selection of Niton as your partner there?

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [112]
------------------------------
 We started having discussions with them in November of last year and in this month we then consummated the transaction. So it does take about a year to do something, which is worthwhile.

 These operators are great and they're good but it's not a situation where we both haven't bargained very hard -- but we bargained hard and fair, as there is a lot of natural gas liquids in this area and they have an expertise which we don't have and we have the property and the processing plant, which is a major part of our bargaining. The selection really came because of knowledge of our people in Calgary and then negotiations took their normal course, and if it doesn't take a year, it's probably not a good deal, we say. So you've got to be realistic on the time and I'm very pleased with this particular project.

------------------------------
 Sean Sweeney,  Milwaukee Private Wealth Management - Analyst   [113]
------------------------------
 All right and just a concluding comment, really. I would agree with George with respect to leveraging your balance sheet. I would respectfully disagree with the gentleman who requested you to raise your dividend.

 I'd rather see you, frankly, retain all of your earnings, reinvest it at rates that I have an expectation you can achieve long-term. So from your shareholder population, you're receiving at least a contra request to retain your capital, please, and invest it wisely.

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [114]
------------------------------
 I appreciate your words. We thank you very much for them.

------------------------------
 Sean Sweeney,  Milwaukee Private Wealth Management - Analyst   [115]
------------------------------
 Sure.

------------------------------
Operator   [116]
------------------------------
 Our next question is a follow-up question from the line of Sven Karlen with Wells Fargo. Please proceed.

------------------------------
 Sven Karlen,  Wells Fargo Securities - Analyst   [117]
------------------------------
 Michael, the Uganda project, has that been favorably impacted in your mind long-term by the recent peace settlement between the Congolese and the Ugandans?

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [118]
------------------------------
 I didn't know there was one, Sven. To be frank, we -- maybe there is, but they always seem to have conflicts. And so--

------------------------------
 Sven Karlen,  Wells Fargo Securities - Analyst   [119]
------------------------------
 I thought there was a press announcement on that last week. I don't know how long that's being going for. I don't know whether that affects that border and where your location is.

 In the past, I recall there have been military skirmishes and part of your cost structure has been the security of that plant. Is that not true?

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [120]
------------------------------
 Absolutely. And you have security costs.

 We had -- when we were running the refinery, we had 220 securities guards, right? Now that's reduced substantially and we're now in the transition over and that's going quite well.

 But when I say everything is going good in Africa, they have a crisis every day in the morning. At the end of the day, they solve their crisis. And I just hand it to the Management and I'm very pleased and we just believe that we're going to create an economic benefit for the people in Uganda with the electricity and maybe we can do some other things and as long as we're good corporate citizens and keep a low profile, it will be a win-win for everybody and--

------------------------------
 Sven Karlen,  Wells Fargo Securities - Analyst   [121]
------------------------------
 You said that this power plant is unlikely to be up and running at full capacity until January, but the cash is starting to come. Can you give us some idea of what the potential cash flow from that plant could be on an annual basis once it's up and running 100%?

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [122]
------------------------------
 Actually, I cannot. But we can get that information for you, Sven.

------------------------------
 Sven Karlen,  Wells Fargo Securities - Analyst   [123]
------------------------------
 Okay. Thank you.

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [124]
------------------------------
 Thanks.

------------------------------
Operator   [125]
------------------------------
 Ladies and gentlemen, we have no further questions at this time. I would like to turn the conference back over to Mr. Michael Smith, CEO, for closing comments.

------------------------------
 Michael Smith,  MFC Industrial Ltd - Chairman & CEO   [126]
------------------------------
 We thank you very much for joining our call today and we invite you to come to myself or Rene Randall with any other questions which you may have and I look forward to talking to you at the end of next quarter. Thank you very much.

------------------------------
Operator   [127]
------------------------------
 Thank you for your participation in today's conference. As this concludes your presentation, you may all disconnect. Good day, everyone.




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