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CEO Letter Result for 2015

We are very pleased with our results for 2015. While the Chinese economy has been weak and our businesses are economically sensitive, we produced excellent results.

 

Net revenues increased 43% to $162.3 million from $113.7 million. Gross profit increased 67% to $53.3 million. Income from operations increased 90% to $45.2 million. Net income increased 91% to $34.1 million. Primary EPS increased 63% to $0.75 from $0.46, while our fully diluted EPS increased 61% to $0.74.

 

We achieved these results while maintaining an extremely strong balance sheet. At year-end, cash was $133.6 million ($2.89 per share). Net net cash, (cash minus all liabilities), was $115 million ($2.48 per share). Working capital was $174.8 million, ($3.78 per share). Shareholders equity was $338.1 million ($7.31 per share). Cash flow from operations increased 51% to $70.4 million ($1.51 per share).

 

I am extremely proud of the way in which we have managed our business. Our team deserves great credit for producing these strong results in a difficult environment.

 

Sales of Bromine declined by 1.3%, including the sales to our Rongyuan subsidiary. Pricing increased 10% to $3,162. We expect pricing to remain strong in 2016, aided by international demand, the decline in the RMB, and environmental regulations that have hurt our smaller competitors. Gross profit margins bromine were 30%, compared in 25% in 2014. Income from operations increased 14% to $10.9 million.

We spent $22.5 million to enhance the productivity and improve environmental controls our factories. We expect to spend $15 million in 2016. We believe this spending will enable us to maintain an advantage over smaller competitors. 

 

Crude salt revenue declined 2% to $10.5 million. Gross profit increased by 32.7%. Income from operations increased 65% to $1.2 million.

 

Chemicals revenues increased 121% to $99.4 million from $45.0 million. Our original chemical business was strong with increases in oil & gas, paper manufacturing, and pesticides, even though these end markets were weak. Rongyuan performed very well. Income from operations in chemicals increased 129% to $33.0 million from $18.6 million, Rongyuan earned $16,886,799, while our traditional chemical business earned $16,111,07.

 

We made excellent progress on our natural gas drilling project in Sichuan Province.  In January, we discovered natural gas at our bromine mine in Daying County. This location is quite close to the location where China National Petroleum made the largest natural gas discovery in Chinese history, estimated to be more than 400 billion cubic meters. Since natural gas is in short supply in China, we were very excited by this opportunity.

 

We hired a major Chinese energy company to assess this well. In May, it concluded there was a significant amount of natural gas at this location that could be profitably developed. For the next several months, we explored the opportunities for drilling both natural gas and brine (bromine and crude salt) in Sichuan Province.

 

In November, we reached an agreement with the government of Daying County. In this agreement, we agreed to invest up to $172 million for drilling natural gas and brine resources. This investment is a commitment, as opposed to a requirement. If we do not receive the permits we are seeking or if the wells do not produce the required return, we will not proceed.  

 

The money, should we invest, will be spent for drilling, extraction, and production of natural gas, compression equipment, storage depots, pumping stations, trucks and other transportation equipment, roads, workers’ housing, and other related expenditures. The government of Daying County will work closely with us to assist us in gaining needed permits for drilling and infrastructure.

 

We have no way of projecting how successful this project will be. We know there are large deposits of natural gas and brine resources in the region and our agreement with the government of Daying County puts us in a very strong position. We cannot tell you at this time whether we will drill 1, 10, 30, 50, or 100 wells over an extended period of time. Nor can we tell you what the returns will be. However, this is a potentially transformative opportunity for Gulf Resources. In the best case scenario, our sales and earnings could be many times higher than they are at the present time.  Should the best case come to pass, our company should be able to attract major interest from institutional investors and strategic partners. 

 

We are now building out the infrastructure for this project.  We are in the process of building the roads in this remote and rugged area.  We are also finalizing the comprehensive design for our factory, including bringing in the needed power. We expect this process will take a few more months. Our goal is to start production within the next 4 to 6 months. As soon as the factory becomes operational and we can verify the profitability of this project, we will apply for permissions to drill additional wells.

 

As I indicated earlier, I am very proud of the way our team has operated during this difficult period of time in China. We believe sales and earnings in 2016 will continue to improve due to good pricing in bromine and strong demand for our chemicals. We are optimistic about the potentially transformative natural gas opportunities in Sichuan. We believe the next few years will be exciting and profitable for our company and our shareholders. We want to thank you for the support you have given us and assure you that we are working as hard as we can to produce continued strong results.