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Edited Transcript of GURE earnings conference call or presentation 15-Aug-19 12:30pm GMT

Q2 2019 Gulf Resources Inc Earnings Call

WEIFANG Sep 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Gulf Resources Inc earnings conference call or presentation Thursday, August 15, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Helen Xu

Gulf Resources, Inc. - IR Director

* Min Li

Gulf Resources, Inc. - CFO

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Conference Call Participants

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* Massimo Fiorella

- Private Investor

* Randolph Leggate

- Private Investor

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Presentation

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Operator [1]

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Greetings, and welcome to the Gulf Resources 2019 Second Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Helen Xu, Investor Relations Director. Thank you. You may begin.

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Helen Xu, Gulf Resources, Inc. - IR Director [2]

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Thank you, operator. Good morning, ladies and gentlemen, and good evening to those you who join us from China, and we'd like to welcome all of you to Gulf Resources' Second Quarter 2019 Earnings Conference Call. My name is Helen, the IR Director. Our CFO of the company, Mr. Min Li, will also join this call today. I will be offering translation of his comments for the company's operating results during the Q&A section.

I would like to remind you to all our business that in this call, certain management statements during the call will contain forward-looking information about Gulf Resources, Inc. and its subsidiaries, business and products within the meaning of Rule 175 under Securities Act of 1933 and Rule 3b-6 under the Securities Exchange Act of 1934, and are subject to the Safe Harbor created by those rules. Actual results may differ from those discussed today taking into account a number of risk factors, including but not limited to, the general economic and the business condition in China, future product development and production capabilities, shipments to end customers, market acceptance of new and existing products, additional competition from existing and new competition from the bromine and the other oilfields and the power production chemicals, changing technology, the ability to make future bromine assets and the various other factors beyond company's control.

All forward-looking statements are expressly qualified in their entirety by this cautionary statement and the risk factors detailed in the company's reports filed with the SEC. Gulf Resources assumes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. According to our company's beliefs, expectations reflected in these forward-looking statements are reasonable, and there can be no assurance of such will prove to be correct. In addition, any reference to the company's future performance represents the management's estimates as of today, the 15th of August 2019.

For those of you unable to listen to the entire call at this time, a replay will be available for 14 days at the company's website. The call is also accessible through the webcast, and the link is accessible through our website. So please locate our press release issued earlier for the details. (foreign language)

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Min Li, Gulf Resources, Inc. - CFO [3]

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[Interpreted] Hi, everyone. Thanks for attending the -- thank you for attending Gulf Resources' 2019 Second Quarter Earnings Conference Call. I am the CFO, Mr. Min Li. The past 18 months were extremely difficult for us. Now we are beginning to get our major facilities back in operation and are very excited about our business.

During the second quarter, the government of China continued to take steps to improve the environment by ensuring that industries such as chemicals, mining and natural gas operated in a manner that maximized safety and minimized damage to environment. The government regulations required a substantial amount of work from the company and its competitors. We believe that a large percentage of the factories and mines may not receive the required approvals to be opened. However, the government believes this is the only way to ensure the future health and safety of its residents.

We believe the government is taking the proper steps to protect and improve the environment. We understand it's a complicated issue. We are very pleased to have been able to open our 2 largest bromine and crude salt facilities. Our new equipment is functioning well, and we believe we will continue to carefully ramp up production in this quarter. We also believe we will receive approvals in some of our other bromine and crude salt facilities in the future. We are confident we will receive approval from the government to build and commence operations in our new chemical factory. Although we cannot predict timing of such approvals, we also believe we will receive approvals to continue our production of natural gas and brine water in Sichuan Province.

Our financial strength remains very strong. We have $3.40 per share in cash. Our cash minus all of our liabilities is still $2.51 per share, even after our major investments. We have began production and are approaching breakeven. We expect to be profitable in the near future. It has been a long and a frustrating process. But we are optimistic about the future.

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Min Li, Gulf Resources, Inc. - CFO [4]

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(foreign language)

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Helen Xu, Gulf Resources, Inc. - IR Director [5]

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Okay. Thank you, Mr. Li. And thank you for also -- for attending our second quarter earnings call of the financial and operating results, which has included, yes, the answers to most of the fantastic questions we have received from investors. In this quarter, we cancelled the -- our natural gas well in Sichuan and opened our 2 largest bromine and crude salt factories, #1 and #7.

For the second quarter 2019 compared to the same quarter of 2018, firstly, the net revenue was approximately $6 million as compared to $4,000. Gross profit was approximately $50 million (sic) [$3 million] as compared to around $400 (sic) [$4,000.] Direct labor and factory overheads incurred during plant shutdown were approximately $2.9 million as compared to $5.7 million of last year.

General and administrative expenses were approximately $1.2 million (sic) [$1.3 million] as compared to $1.1 million in last year 2018 second quarter. The loss before taxes was approximately $1.1 million compared to approximately $6.7 million. Net loss was $742,700 (sic) [$737,700] as compared to around $4.8 million. Earnings per share were a loss of $0.02 versus a loss of $0.10. Cash and cash equivalents were around approximately $160.4 million compared to $179 million. Cash per share was $3.40 against $3.82. Net-net cash per share, which is cash minus all liabilities, which is $2.51 from this quarter of 2019. Book value per share was $6.10 for the second quarter of 2019. Now let's recap by segment.

Firstly let's look at bromine and crude salt. In April, as we discussed, the company had opened factories #1. #7 is a combination of #5 and #7. These are our 2 largest factories, accounting for approximately 43 percentage of our total capacity because of equipment and lease. And we are on track, so we are moving very carefully including our production.

To date, we are very pleased with the performance of our new machinery and equipment. We will increase our production flow out in the remainder of the year and should be producing at full production by year-end. But August is dependent upon the flood situation, which just happened a few days ago.

During the 6 -- first 6 months of 2019, we invested $39.6 million in property, plant and equipment. The major portion of this investment was for the new drilled bromine wells to increase the productivity of facilities to ensure the level of profitability in the future and was not related to the rectification processes. Even with only 2 factories open and with these factories operating at a low level, bromine still had revenue of approximately $5.7 million. The price of bromine continually remains at a high level. At the current time, the price is approximately RMB 33,000 per tonne include VAT. The closure of many mines and declined RMB against other currencies should keep the price at elevated level.

The company continues to believe that the bromine and crude salt business will become quite profitable. The gross profit margin for the bromine segment was 53 percentage, a very high attractive level. As the ramp-up productions will be reached in the next quarter, we expect to achieve substantial levels of profitability depending on the general conditions. Its loss from operation was approximately $36,700 compared to $5.6 million last year second quarter. As you can see, our bromine business is very close to breakeven and should soon be profitable. Bromine prices in China remain very strong. At this time, we are approaching this. With the closing of most of the bromine factories, there is much less supply and the return on the value of the RMB per dollar in spot price are very high.

Crude salt revenues were around $245,000. And loss from operations was about $828,000 as compared to $1.7 million. Because of the timing of opening of factories #1 and #7, our crude salt production lagged our bromine production. However, we expect it to ramp up soon. We have completed the rectification of our remaining factories #2, #8, #9 and #10, and the subdivision of factory #1. We do not expect to have to conduct any further rectification. The remaining issues relate to approval, so project approval, planning approval, land use rights approval and environmental protection assessment. We cannot determine the timing for the approvals of the other factories. However, we have been working closely with the government and we believe we have taken appropriate steps needed to obtain final approvals. We are optimistic about that these factories will eventually get an approval.

The land for those demolished factories has been returned to the local villages. [Between 20 and 50 years,] they are maybe excellent acquisition opportunities, but we are not going to make any acquisition until we have most of our remaining facilities open. In addition, we will not make any acquisitions unless we are certain we will receive full approval for operation.

Now let's look at chemical products. We are waiting for governmental approval for our new chemical plant. To date, we have invested approximately $11 million for a 50-year lease of a parcel of land and the design of the new chemical factory. While we are confident we will receive approval to build this factory, we cannot provide any guidance about the timing of this approval, the construction or the beginning of the production. Once we receive full approval, we will update investors with a new time line.

Now let's look at natural gas segment. On May 29, 2019, the company received a verbal notice from the government of Tianbao Town in Daying County, Sichuan Province that the company will be required to obtain project approval for its well, including the natural gas and brine water projects, and approvals for safety production inspection, environmental protection assessment and related land issues. Upon receipt of this notice, the company halted trial production of its natural gas well in Daying County.

The company now currently has been working closely with the local government in Tianbao Town and Daying County to meet the new provincial regulations. The local and county governments have been very supportive, but the company still needs provincial approval. The company is confident that this approval will be obtained. In addition, the company believes that approval will provide the ability to drill more than 1 well. However, at this time, there is no way of knowing when all of the approvals will be received and production will commence. During the quarter, we had minimal revenue and a small loss in our natural gas segment.

Balance sheet. The company ended the quarter with cash and cash equivalents of approximately $160.4 million. Cash per share was $3.40. Net-net cash per share was $2.51. Book value per share was $6.10. Now let's look at about -- the discussion about the company's share price. The company is very disappointed in the current price of the shares. The company fully understands the reason for the low price. We thought our facilities would be open soon. We thought the government had settled on a final plan only to learn that more strict requirements were being put in place. We wish our facilities were all currently open, but we are spending the money necessary to meet the government's requirements and to ensure that our facilities will be producing at high levels when they are opened.

We'd like to take some of our capital and buy back shares at the current price, but we cannot get money out of China at the present time. Our Chairman, Mr. Yang, is still committed to his buyback shares and he is out of sorts, suffering difficulties to get his own money out of China, but he's trying to consider other ways to do the buyback.

We also know that we have to fill our open director, independent director's position to satisfy the requirements of NASDAQ. We are currently working to add an independent director and will take other necessary steps to ensure we meet NASDAQ's listing requirements. We will try our best -- we will try to do our best to meet the requirements of NASDAQ.

Now we are open for the call to discussion. Honeychelle, can we open the Q&A section?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of [Massimo Fiorella], who is a private investor.

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Massimo Fiorella, - Private Investor [2]

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Yes, I have 3 questions, basically. The first one is about NASDAQ listing, the second one about cash and the third one about negative enterprise value. I will start with the first one. As you mentioned before, on 28th of June, you have been notified that you are no longer in compliance with NASDAQ independent directors and audit commitment requirement. And you have time until October to get compliant. Above all, you are also no longer in compliance with $1 stock price since shares listed in NASDAQ should have a price of stock above $1 to be listed. I would like to know what will be your action to get compliance about these points. And if for you, it's very important that you will be NASDAQ listed in long term and you consider it as a priority.

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Helen Xu, Gulf Resources, Inc. - IR Director [3]

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(foreign language)

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Min Li, Gulf Resources, Inc. - CFO [4]

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[Interpreted] Firstly, regarding the listing independent director requirement, company, as we discussed in the script before earlier, company is looking for and working on. We will satisfy this requirement from NASDAQ. Secondly, regarding if there is a price of stock is below $1, and there is the requirement from NASDAQ, NASDAQ will send the company notice letter, first of all, recommending obviously what to do to satisfy its requirements, but until now, we did not receive any letter yet from NASDAQ. Once we have any news, we will let our investor know at the first chance.

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Massimo Fiorella, - Private Investor [5]

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Okay. My second question is about cash. This quarter, Gulf Resources is close to breakeven. And so probably in the next quarter, you will probably restart to post profits and cash flow since you went back to production. In the last year, you have correctly invested money, rectification in your business. But now you have, again, $160 million in cash, and you are back in production. I ask you to commit part of this cash to buyback program and/or dividends. Obviously, buyback program in open market. So price of share will increase above $1, and you will also resolve the NASDAQ listing issue. You will boost confidence in investor.

If you, for example, commit only 1% of your total cash in buyback program on open market, it will be only $1.6 million. It doesn't change anything on your investment plan since $1.6 million is a very low amount compared to $160 million that you have in cash and a, today, very low valuation. With $1.6 million, you will buy 3% or 4% of the total share of the company since GURE, as of now, is trading at the value of $40 million equity value. So I want to get some clarification about these points.

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Helen Xu, Gulf Resources, Inc. - IR Director [6]

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Okay. This question, we have been always discussed during every quarter of our call -- earnings call. The company would like to take some of our capital and buy back shares at the current price, but now, we -- very hard to get money out of China at the present time due to Chinese policy and government regulation. Our Chairman, Mr. Yang, who before did announce his buyback shares. And he's still committed to these buyback shares. But he's also suffering difficulties to get his own money out of China. But he's trying to consider other ways to do the buyback, which we cannot disclose too much about it now. Once we have his -- Mr. Yang's decided how to do it, we will let investor know and once we buy back shares.

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Massimo Fiorella, - Private Investor [7]

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Okay. That one is clear. But above all, you have $160 million in cash, also if you did only $1 million, that is not a big amount to take out of China. It will be good because $1 million is 2% of share -- total shares. So I will think that this one would be very good. If you take out only $1 million that is not a very good -- a very big amount, it will work. And the third question...

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Helen Xu, Gulf Resources, Inc. - IR Director [8]

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Well, it's not become about the amount, it's become -- it's due to the reason, what this money is for. And we had to complete the application to government and banks and they need to approve it.

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Massimo Fiorella, - Private Investor [9]

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Okay. And the third question is about that as of now, you are a negative enterprise value. So I want that you comment something about it because as of now, you have $160 million in cash and all the company, Gulf Resources, including in cash, is trading at $40 million. So it means that the market is valuating the activity of all the company minus $120 million. So I want that you please do some comment on this one because it's very strange situation and Gulf Resources is the only company that know this answer after the production valued by the market minus $120 million.

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Helen Xu, Gulf Resources, Inc. - IR Director [10]

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Yes, we understand that the company's stock has been really devalued. And we also want to come to its real price, which can correctly present the company's situation. But currently, like we said, if we will announce any buyback or any paid dividend, then we are committed to do it. But the company is finding it difficult to get money out of China. We want to do what we promised to our shareholders.

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Operator [11]

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(Operator Instructions) Our next question comes from the line of Charlie [Sheever] with Sheever Partners.

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Unidentified Analyst [12]

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Yes, can you tell me a little bit more about the -- on the chemical products, you spent $10.9 million for a 50-year lease.

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Helen Xu, Gulf Resources, Inc. - IR Director [13]

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Yes.

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Unidentified Analyst [14]

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Was there any money spent on construction or purchase of property or is that just a lease?

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Helen Xu, Gulf Resources, Inc. - IR Director [15]

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No, not yet. Until now, the company lease this land, parcel of land for 50 years. And we've got the approval for the design of the chemical factories. But we are still waiting for the approval to build these facilities. So that's why we did not have expense yet on the construction.

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Unidentified Analyst [16]

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Okay. But the $10.9 million, did that go to the property? Is it owned by any insiders? Or is that completely a third-party transaction?

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Helen Xu, Gulf Resources, Inc. - IR Director [17]

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No. It's actually -- it's a government chemical build, [government chemical garden.]

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Unidentified Analyst [18]

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So that property is owned by the government?

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Helen Xu, Gulf Resources, Inc. - IR Director [19]

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It's like an area commonly -- government designed. It's for all chemical factories to be there.

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Unidentified Analyst [20]

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Okay. My next question is you're saying that you cannot do a stock buyback because you cannot get money out of the country, and you cannot do a dividend because you cannot get money out of the country. Is that correct?

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Helen Xu, Gulf Resources, Inc. - IR Director [21]

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Yes, we have difficulties. Yes, we are having difficulties now (inaudible) out of China.

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Unidentified Analyst [22]

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Okay. My third question is the bromine that's being imported from outside the country, which countries is that mostly coming from?

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Helen Xu, Gulf Resources, Inc. - IR Director [23]

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Sorry, I missed. Do you mind asking it again?

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Unidentified Analyst [24]

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Okay. China is importing bromine, a lot of it. And the question is where is the bromine coming from? Is it coming from Israel or South America or Australia?

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Helen Xu, Gulf Resources, Inc. - IR Director [25]

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U.S. and Israel, these 2 major places. But China is not importing pure bromine. It's importing the downstream products, which made from bromine.

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Unidentified Analyst [26]

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Okay. And then what percentage of the bromine capacity for all of China, what is the capacity utilization at this point?

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Helen Xu, Gulf Resources, Inc. - IR Director [27]

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Sorry, we don't have this analysis now. That is takes months or a year.

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Operator [28]

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Our next question comes from the line of Randolph [Leggate], who is a private investor.

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Randolph Leggate, - Private Investor [29]

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Let me ask you a quick question. Why is the company so adamant about not partnering with somebody on the natural gas deals? Just seems like that's such an opportunity. And I know you all are having problems right at the moment, but why are we not looking at a bigger company to help us get that advanced?

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Helen Xu, Gulf Resources, Inc. - IR Director [30]

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Okay. I will ask about these questions for Mr. Min Li, okay? (foreign language)

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Min Li, Gulf Resources, Inc. - CFO [31]

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[Interpreted] First of all, we don't think our natural gas is having any difficulties. We think we can handle all the cash and the commission projects by ourselves. Secondly, if there is some really strong partners who want join, that's okay. We can accept or we can consider about it. And currently, there is no -- at the beginning of this project, there was some potential, but the discussion was not going well. Currently, there isn't any possible partners.

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Randolph Leggate, - Private Investor [32]

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Okay. One other quick question, Helen. Did you all ever get any indication on how big that field might be by doing all this testing? And I know you -- I think you had a university to help you all look at that.

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Helen Xu, Gulf Resources, Inc. - IR Director [33]

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You mean the field -- the natural gas field?

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Randolph Leggate, - Private Investor [34]

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Yes, ma'am.

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Helen Xu, Gulf Resources, Inc. - IR Director [35]

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We've already disclosed about it at very beginning of this natural gas project. I think I have to go back to check about it.

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Randolph Leggate, - Private Investor [36]

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Okay. I'll just send you an e-mail.

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Helen Xu, Gulf Resources, Inc. - IR Director [37]

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I don't have exactly the number. Yes, yes.

(foreign language)

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Min Li, Gulf Resources, Inc. - CFO [38]

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[Interpreted] Yes, I just confirmed with him, he also cannot remember exactly how big the field, but we should have the press release about the (inaudible) for that (inaudible) [package].

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Operator [39]

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(Operator Instructions) Our next question comes from the line of Rob [Dejanna], who is a private investor.

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Min Li, Gulf Resources, Inc. - CFO [40]

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(foreign language)

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Helen Xu, Gulf Resources, Inc. - IR Director [41]

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(foreign language)

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Operator [42]

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Rob, can you check to see if your line is on mute? There are no further questions at this time. Helen, I'd like to turn the call back over to you for any closing remarks.

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Helen Xu, Gulf Resources, Inc. - IR Director [43]

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Okay, thank you. (foreign language)

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Min Li, Gulf Resources, Inc. - CFO [44]

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(foreign language)

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Helen Xu, Gulf Resources, Inc. - IR Director [45]

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Okay, thank you very much for all to attending our call and for the support to the company. Thank you very much. Have a good night, and have good day. Thank you.

Hi, operator, I think we can close the call for today.

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Operator [46]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]