Annual report pursuant to Section 13 and 15(d)

INVESTMENT IN AL MASANE AL KOBRA MINING COMPANY ("AMAK")

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INVESTMENT IN AL MASANE AL KOBRA MINING COMPANY ("AMAK")
 12 Months Ended
Dec. 31, 2016
INVESTMENT IN AL MASANE AL KOBRA MINING COMPANY ("AMAK") [Abstract]  
INVESTMENT IN AL MASANE AL KOBRA MINING COMPANY ("AMAK")
NOTE 11 - INVESTMENT IN AL MASANE AL KOBRA MINING COMPANY (“AMAK”)

We have concluded that we have significant influence over the operating and financial policies of AMAK and, accordingly, should account for our investment in AMAK using the equity method.  As of December 31, 2016, and 2015, we had a non-controlling equity interest of approximately $49.4 million and $47.7 million, respectively.

We have received and attached to this Form 10-K the financial statements of AMAK prepared in accordance with generally accepted accounting principles in the United States of America as of December 31, 2016, and 2015, and for each of the three years ended December 31, 2016.  These financial statements have been prepared in the functional currency of AMAK which is the Saudi Riyal (SR).  In June 1986 the SR was officially pegged to the U.S. Dollar (USD) at a fixed exchange rate of 1 USD to 3.75 SR.

The summarized results of operation and financial position for AMAK are as follows:

Results of Operations

   
Years Ended December 31,
  
   
2016
    
2015
    
2014
  
   
(Thousands of Dollars)
  
Sales
  
$
9,921
    
$
50,744
    
$
63,300
  
Gross profit (loss)
    
(17,211
)
    
(10,437
)
    
3,624
  
General, administrative and other expenses
    
9,690
      
8,796
      
10,487
  
Loss from operations
  
$
(26,901
)
  
$
(19,233
)
  
$
(6,863
)
Gain on settlement with former operator
    
17,425
      
-
      
-
  
Net loss
  
$
(9,476
)
  
$
(19,233
)
  
$
(6,863
)

Depreciation and amortization for the years ended December 31, 2016, 2015, and 2014 was $11.7 million, $23.2 million and $23.7 million, respectively.  Therefore, net income before depreciation and amortization was as follows:

   
Years Ended December 31,
  
   
2016
    
2015
    
2014
  
   
(Thousands of Dollars)
  
Net income before depreciation and amortization
  
$
2,196
    
$
4,016
    
$
16,845
  

Financial Position

   
December 31,
  
   
2016
    
2015
  
   
(Thousands of Dollars)
  
Current assets
  
$
22,860
    
$
26,078
  
Noncurrent assets
    
251,741
      
255,613
  
Total assets
  
$
274,601
    
$
281,691
  
                 
Current liabilities
  
$
8,005
    
$
22,740
  
Long term liabilities
    
82,546
      
85,450
  
Shareholders' equity
    
184,050
      
173,501
  
Total liabilities and equity
  
$
274,601
    
$
281,691
  

The equity in the income or loss of AMAK reflected on the consolidated statements of income for the years ended December 31, 2016, 2015, and 2014, is comprised of the following:

   
2016
    
2015
    
2014
  
AMAK Net Loss
  
$
(9,476
)
  
$
(19,233
)
  
$
(6,863
)
Zakat tax applicable to Saudi Arabian shareholders only
    
320
      
303
      
-
  
AMAK Net Loss before Saudi Arabian shareholders’ portion of Zakat
  
$
(9,156
)
  
$
(18,930
)
  
$
(6,863
)
                         
Company’s share of loss reported by AMAK (33.44% beginning July 10, 2016 and  35.25% prior to July 10, 2016)
  
$
(2,826
)
  
$
(6,672
)
  
$
(2,419
)
Amortization of difference between Company’s investment in AMAK
                        
  and Company’s share of net assets of AMAK
    
1,347
      
1,347
      
1,347
  
Equity in loss of AMAK
  
$
(1,479
)
  
$
(5,325
)
  
$
(1,072
)

The difference between our effective share of income (loss) from our investment and our actual ownership percentage is attributable to the change in our ownership percentage during the third quarter.

A gain of approximately $16.2 million for the difference between our initial investment in AMAK and our share of AMAK’s initial assets recorded at fair value was not recognized in 2008.  This basis difference is being amortized over the life of AMAK’s mine which is estimated to be twelve years beginning with its commencement of production in July 2012 as an adjustment to our equity in AMAK’s income or loss.

In July 2016 AMAK issued four million shares to provide additional funds for ongoing exploration work and mine start-up activities.  Arab Mining Co. (“Armico”) purchased 3.75 million shares at SR 20 per share (USD$5.33 per share) and the remaining 250,000 shares are for future use as employee incentives.  We did not participate in the offering, thereby reducing our ownership percentage in AMAK to 33.44% from 35.25%.  As a result of the equity issuance, our share of the net assets of AMAK increased approximately $3.2 million which we recognized as a gain (with a corresponding increase in our investment) in accordance with ASC 323-10-40-1.

The following table shows AMAK shareholders and percentages owned at December 31, 2016:

Name
  
Percentage Owned
  
Various Saudi shareholders
    
46.73
%
Trecora Resources
    
33.44
%
Armico
    
19.51
%
Treasury
    
0.32
%
Total
    
100.00
%

At December 31, 2016, we had a receivable from AMAK of approximately $14,000 relating to unreimbursed travel expenses.

We assess our investment in AMAK for impairment when events are identified, or there are changes in circumstances that may have an adverse effect on the fair value or recoverability of the investment.  We consider recoverable ore reserves and the amount and timing of the cash flows to be generated by the production of those reserves, as well as, recent equity transactions within AMAK.  No impairment charges were recorded in 2016, 2015, or 2014.