Annual report pursuant to Section 13 and 15(d)

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

v3.19.1
INVESTMENT IN AL MASANE AL KOBRA MINING COMPANY ("AMAK")
 12 Months Ended
Dec. 31, 2018
Equity Method Investments and Joint Ventures [Abstract]  
INVESTMENT IN AL MASANE AL KOBRA MINING COMPANY (AMAK)
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, 2018, and 2017, we had a non-controlling equity interest of approximately $38.7 million and $45.1 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, 2018, and 2017, and for each of the three years ended December 31, 2018. 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,
 
2018

 
2017

 
2016

 
(Thousands of Dollars)
Sales
$
70,234

 
$
36,435

 
$
9,921

Cost of sales
(68,084
)
 
(43,304
)
 
(27,132
)
Gross loss
2,150

 
(6,869
)
 
(17,211
)
General, administrative and other expenses
8,879

 
9,903

 
9,690

Loss from operations
$
(6,729
)
 
$
(16,772
)
 
$
(26,901
)
Gain on settlement with former operator
—

 
—

 
17,425

Net loss
$
(6,729
)
 
$
(16,772
)

$
(9,476
)
Depreciation and amortization
33,469

 
22,419

 
11,672

Net income before depreciation and amortization
$
26,740

 
$
5,648

 
$
2,196

Financial Position
 
December 31,
 
2018

 
2017

 
(Thousands of Dollars)
Current assets
$
44,093

 
$
23,333

Noncurrent assets
212,291

 
237,875

Total assets
$
256,384


$
261,208

 
 
 
 
Current liabilities
$
17,160

 
$
24,439

Long term liabilities
77,366

 
68,837

Shareholders' equity
161,858

 
167,932

Total liabilities and equity
$
256,384


$
261,208


The equity in the income or loss of AMAK reflected on the consolidated statements of income for the years ended December 31, 2018, 2017, and 2016, is comprised of the following:
 
2018

 
2017

 
2016

AMAK Net Loss
$
(6,729
)
 
$
(16,772
)
 
$
(9,476
)
Zakat tax applicable to Saudi Arabian shareholders only
—

 
—

 
320

AMAK Net Loss before Saudi Arabian shareholders' portion of Zakat
$
(6,729
)

$
(16,772
)

$
(9,156
)
 
 
 
 
 
 
Company's share of loss reported by AMAK (33.41% beginning July 10, 2016 and 35.25% prior to July 10, 2016)
$
(2,248
)
 
$
(5,608
)
 
$
(2,826
)
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
$
(901
)

$
(4,261
)

$
(1,479
)

In 2016 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 of 2016.
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.
In 2018, we completed an exchange of shares with certain shareholders whereby such shareholders traded 65,000 common shares of TREC in exchange for 24,489 shares of our AMAK stock.  The 65,000 shares were accounted for as treasury stock.  This transaction reduced our ownership percentage from 33.44% to 33.41%.

The following table shows AMAK shareholders and percentages owned at December 31, 2018:
Name
Percentage Owned

Various Saudi shareholders
46.73
%
Trecora Resources
33.41
%
Armico
19.86
%
Total
100.00
%

As previously announced, AMAK initiated a share repurchase program from its existing shareholders in December 2018. We participated in this share repurchase and received approximately $5.3 million in proceeds from AMAK. We had previously reported, based on information available at the time, that AMAK was repurchasing 10% of its outstanding shares from its existing shareholders on a pro-rata basis. We have since learned that, while a redemption of up to 10% of AMAK's 82 million outstanding shares had been approved by the shareholders, the repurchase program approved by AMAK's board of directors and initiated in December 2018 was with respect to 2.5 million shares. AMAK expects to complete the share repurchase program in 2019, at which point all shares repurchased from AMAK shareholders will be registered as treasury shares. Upon completion of the share repurchase program, the Company does not believe its ownership percentage in AMAK will change from 33.4%.
At December 31, 2018 and 2017, we had a receivable from AMAK of approximately $54,000 and $121,000, respectively, relating to unreimbursed travel and Board expenses which is included in prepaid and other assets.
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 2018, 2017, or 2016.