LSB Industries Inc. Chairman and CEO Jack Golsen told analysts May 6 that while the company’s Pryor, Okla., nitrogen facility is producing, it is not yet at targeted quantities. “If we were producing at targeted quantities, we’d be making substantial profits today, but we’re not quite doing that. So at this point, I would say we’re virtually covering our costs.” He said the company will put out a press release when UAN production gets to a sustained basis.
“Startup delays were primarily a result of unanticipated equipment issues that were discovered after we began the startup process,” said Barry Golsen, LSB vice chairman and president. “Some of these were due to vendor deficiencies and some were just not possible to foresee until we activated the plant.” He said that when equipment issues arose, in some cases there were significant vendor lead times. LSB believes those issues are now behind it.
Pryor startup costs were $6 million in the first quarter ending March 31, 2010 (GM May 10, p. 9).
Barry Golsen continued, “considering the delay cost and additional capital equipment required, our current estimates of the total cost to-date to reactivate Pryor are approximately $36 million; $11 million capitalized and $25 million startup expenses that were expensed off as incurred. Our primary rationale for reopening Pryor was the change in the nitrogen fertilizer industry in the U.S. over the past several years, coupled with the long-term favorable outlook for fertilizer products. Today, we believe those reasons are still valid and the long-term outlook is even stronger.”
“Taking all of this into consideration, if we knew before we started the Pryor project that it would cost $36 million, would we have undertaken it?” asked Barry Golsen. “Yes. We will complete Pryor for a fraction of the cost of a comparable new plant. We believe that Pryor is a valuable asset that will contribute to earnings for many years to come. We also believe our partnership with Koch on this project will facilitate the growth of this business for LSB.”
To sum up the positives for nitrogen, LSB’s CFO Tony Shelby gave a long list – cheap gas in the U.S.; high prices for gas in countries such as Ukraine, which used to be a low-cost producer; contraction in the number of nitrogen plants in the past ten years; corn requiring a lot of nitrogen; more corn due to the ethanol mandate; and global population growth.
On a new market, Jack Golsen said the diesel fuel fluid (DEF) business has not materialized the way its competitors thought it would. “We entered the DEF business in anticipation of a five-year span before it became a major business in the U.S. Contrary to what some of our competition thought, that it would be a big business, it has not materialized into as big a business as they thought. It has been more in line with what we thought. And the reason for that is it only was applicable to new diesel engines and trucks of a certain size and larger.”
Golsen said a lot of companies that used to trade their trucks on an annual basis seem to have held back from buying this year. “We have been shipping DEF, but it’s not yet a major product for us and it’s not expected to be a major product for a couple of years.” However, he said that it was best to get into the DEF business from its start, and not in the middle.
Supplementing results reported last week (GM May 10, p. 9), the Chemical unit’s agricultural sales saw a 25.3 percent drop, to $24.5 million for the first quarter ending March 31, 2010, versus the year-ago $32.8 million. Tonnage volumes were off 14 percent. Industrial acids and other chemicals saw a 23.1 percent increase, to $31.1 million from the year-ago $25.3 million, with a 44 percent increase in tonnage. Mining products were up 17.5 percent, to $19.3 million from 1Q 09’s $16.4 million, with volumes off 14 percent.
In the meantime, LSB told Green Markets that its Bryan, Texas, distribution facility is essentially rebuilt after being destroyed by a fire last summer (GM Aug. 10, 2009). Only minor modifications are underway on the load-out system. The company received over $1.5 million in insurance from this incident.
LSB is opting not to rebuild a smaller nitric acid plant (182 st/d) damaged by a February 2009 fire (GM Feb. 23, 2009) at its Cherokee, Ala., nitrogen facility, at least for now, even though the company collected some $1 million in insurance related to the damage in first quarter 2010. The company said the renovation is currently tabled due to timing, as LSB has a number of other capital expenditures underway. The Cherokee plant continues to operate, however, utilizing another, larger nitric acid plant at the site.
In other news, LSB says its Climate Control business has signed a letter of intent in connection with the possible acquisition of an air conditioning and heating manufacturer in China. “If we acquire the company, our objective is to establish a platform to grow in the China market, which is now large and is expected to be huge in the future,” said Jack Golsen. The company said if the transaction is completed that it would have approximately $11 million invested, including the purchase price and working capital, plus a nominal amount of shares of LSB common stock. LSB has been told that the business to be acquired had revenues of about $15 million in 2009.