SRL Scully Royalty Ltd

Operator

Good morning and welcome to the MFC Industrial Third Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Gerardo Cortina, President and CEO. Please go ahead.

Gerardo Cortina

Thank you. Welcome to the MFC Industrial quarterly conference call. We thank you for joining today. We are in our Vancouver office. Joining me are Sam Morrow, our CFO; and Rene Randall, Vice President, Investor Relations. Five years ago, MFC entered into the global supply chain business and implemented a long term strategy to grow by expanding geographic reach and diversifying into new product lines. Through organic growth and acquisitions, we enter new markets in North, Central and South America, Europe and Asia and increase our product lines to include natural gas, minerals, metals, ferro-alloys, steel, and wood products among others. As a result of this strategy, we will report that in 2014 revenues of $1.4 billion that represented a compound annual growth rate of almost 30% over the last four years. But this revenue growth did not translate into increased profitability that can be as a result of declining commodity markets, falling prices and our increased competition among other factors, but the fact is that we have not enabled to generate an adequate return on our invested capital. Our primary goal is to become a premier regulated trade finance institution, utilizing our supply chain platform as the foundation to offer banking, trade and structured finance and other services to our wide range of customers and suppliers. To date, we have made some progress and I want to take a moment to give you an update. In June 2015, we announced that we had entered into an agreement to acquire Western European bank subject to customary closing conditions, including the national and European regulatory approvals. The bank will become our [indiscernible] bank and will be the basis for our strategic focus that is trade and structure finance and banking. We expect to have regulatory approvals before the end of 2015. Upon the addition of a front-room regulated bank, we will be able to offer our customers and suppliers a wider range of financial solutions. The back office of the bank will be primarily outsourced. MFC has been involved for over ten years in structure and trade finance. We have in our Vienna office an experienced team offering worldwide services to our value chain and we continue to seek and employ qualified structured and finance professionals as with the bank. As I already mentioned, we will be able to offer our customers and suppliers a wider range of structured finance solutions including factoring, inventory financing, forfeiting, marketing and other types of risk management and financing solutions and be able to improve an overall profitability of our business. We have been working on aligning our board of directors to our strategic focus. And I am pleased to mention that in October 2015, Mr. Friedrich Hondl joined our Board of Directors. Mr. Hondl is an experienced European banking executive and I am sure will make important contributions to our board. We are in the process of evaluating additional candidates with experience on our strategic focus. In the first quarter of 2015, we announced that we determine to rationalize certain of our hydrocarbon assets. We initially intended that the net proceeds of short rationalization would be used to repay the bank debt incurred with the position of these hydrocarbon assets and we deploy to our other business with the balance distributed to our shareholders as a return of capital. The hydrocarbon industry has started to deteriorated and together with market conditions in iron ore, in the third quarter of 2015 we initiated an active program to rationalize all our resource assets including our hydrocarbon and iron ore assets. Our strategic priorities have shifted and the net of our anticipated participation in this projects have changed. We believe that now is a time for prudence as we focus on our future goals and the long term strategy of our core business. As a result, these assets have been recorded as held-for-sale as of September 30, 2015 and the operations and cash flows related to these assets are accounted as discontinued operations. We will recognize a non-cash impairment loss on our resource assets as of September 30, 2015. Any potential future distribution related to the rationalization of our hydrocarbon assets will depend on the timing and amounts received in connection with the rationalization of such assets and there can be no assurances to the timing and amounts of such distributions. Given the current conditions of the resource market and long term natural gas pricing which is reflected in the impairment we recognized in the third quarter of 2015 on these assets, we do not currently anticipate the return of capital. However, this process is ongoing and we will continue to evaluate all options. Our supply chain business that as I mentioned before has grown substantially over the last five years, we continue to improve on working capital employed and cost structure. Over the last six quarters, we have reduced our trade receivables by more than 40% to improve collections and better utilization of our non-recourse factoring lines. We plan to continue on this reduction with the objective to be below $100 million by the end of December 2015 and with additional improvements in the first quarter 2016. On inventories, we are actively working on a reduction plan by reviewing our product lines, increasing turnover and consolidating inventory positions that are in multiple locations. Our objective is to have an inventory level below $175 million by year end and make farther improvements in 2016. This level of inventories will allow us to maintain just in time deliveries that is an important service that we provide to our customers. Now, Sam will discuss with you in more detail our financial results.

Sam Morrow

Thanks, Gerardo and good morning everybody. Our gross revenues from continuing operations for the first nine months of 2015 increased by 10.7% to $1012.5 million from $914.4 million in the same period of 2014, primarily as a result of the consolidation of acquisitions in the second quarter of last year, partially offset by the exiting of certain product lines and the impact of the higher U.S. dollar against the euro. Our cost of sales and services from continuing operations increased to $938.2 million during the nine months ended September 30, 2015 from $844.4 million for the same period of 2014. Gross margin from continuing operations declined to 7.3%, compared to 7.7% in the same period of 2014. This was primarily a result of the consolidation of acquisitions in the second quarter of last year with margin profiles below our corporate average. SG&A from continuing operations decreased to $50 million for the nine months ended September 30 from $53.5 million for the same period in 2014, primarily due to the stronger U.S. dollar versus the euro and the Canadian dollar and the benefits of certain restructuring efforts. The majority of our SG&A is incurred in euros and Canadian dollars. So, weakening of these currencies results in a decline when reported in U.S. dollars. As a percentage of gross revenue, SG&A expenses were 4.9% in the first nine months, compared to 5.9% in the same period of 2014. For the first nine months of 2015, our operating EBITDA from continuing operations was $27.7 million, compared to $16.1 million for the same period of 2014, an increase of 72%. Our net income attributable to our shareholders from continuing operations increased in the first nine months of 2015 to $9.2 million or $0.15 per diluted share from a net loss of $0.8 million or $0.01 per diluted share in the same period of 2014. In the third quarter, we initiated an active program to rationalize all of our resource assets, including our hydrocarbon and iron ore interests. These assets have been recorded as held for sale as of September 30, 2015 and they are now accounted for as discontinued operations. Within discontinued operations, we recognized a non-cash impairment loss of $107.2 million on our hydrocarbon properties and $183.4 million in our iron ore interest. These are gross numbers and in addition to this, we recognized that deferred tax recovery on our iron ore interest of $40.2 million and a reduction of our deferred tax assets on our hydrocarbon properties of $30 million. Our net loss from discontinued operations for the first nine months of 2015, which included these non-cash impairments was $289.3 million or $4.58 per share. Cash and cash equivalents were $298.6 million on September 30, 2015, compared to $297.3 million as of December 31, 2014. On September 30, our trade receivables were $120.4 million, compared to $161.7 million as of December 31, 2014. Six quarters ago, our trade receivables were $207.6 million and our team has done an incredible job in reducing these by more than 40%, but we’ve identified some additional areas of improvement and we expect to be below $100 million by the end of the year. More than 60% of our inventories are either contracted at fixed prices or hedged, while the remainder is comprised of the raw materials, work in progress, and finished goods at our captive supply facilities, and to a much lesser extent strategic inventory such as consignment positions and goods in transit. We've now implemented a plan, which will enable us to reduce these inventories below $175 million before the end of the year with additional improvement in the first quarter of 2015. Our short-term bank borrowings increased to $206.6 million on September 30, 2015 from $161.3 million on December 31, 2014, mainly due to funding mix in the decline of accounts payable. Total long-term debt decreased to $202.6 million on September 30 from $313.1 million on December 31, 2014, primarily as a result of repayments, reclassification of certain debt obligations, which were part of discontinued operations, and the impact of a higher U.S. dollar against the euro. Shareholder's equity was $351 million at September 30, 2015 or $5.56 per share versus $670 million or $10.63 per share on December 31, 2014. And now Gerardo back to you.

Gerardo Cortina

Thank you, Sam. Before we get into a Q&A, let me just make some final comments and reiterate our vision and strategic focus. On our share price, on November 13, 2015 MFC Industrial shares closed at $2.59, down more than 60% since the beginning of the year. Not only have the industries in which we participate underperformed the market, but also our shares have underperformed those industries. While our focus is on long-term value creation, we are currently disappointed with this recent performance on both a comparative and absolute basis. To put this in another perspective MFC trades had approximately 0.47 times book value, which mainly consists of working capital. Without considering our assets held for sale, our shares trade 0.54 times book value. We remain confident in our strategy to rationalize certain assets and leverage our global supply chain platform with the addition of regulated trade finance products and services. We believe this will benefit all our stakeholders and over time our common share will converge with this intrinsic value. Our cash position, as Sam mentioned before, remains strong at $298 million. And taking into account, the acquisition of the European bank that we have announced we want to be very prudent on how we manage our cash, as there will be commitments to this project. As already announced, for the time being we will not enter into a share buyback, but after this process is completed, we will review again this strategy. As I have stated, our goal is to become a Premier regulated trade finance institution. With acquisition of Western European Bank, we will be able to offer our customers and suppliers a wider range of structure finance solution, including factoring, inventory financing, forfaiting, marketing, and other types of risk management and financing solutions. There are significant opportunities to offer structure and trade finance and banking solutions in the markets we serve and many of our current customers and suppliers do not have adequate financing alternatives and could benefit from our services. Today, not tomorrow is the time for significant change. We have the assets, we have the people, and we have the resources. We are there to prudent and disciplined policies and practices to provide certainty to our banking partners, our shareholders customers and suppliers. And we will continue to work diligently to execute our vision. Thank you. Operator, we are now ready for the Q&A.

Operator

[Operator Instructions] Our first question comes from Doug Weiss of DSW Investment. Please go ahead.

Doug Weiss

Hi, good morning.

Gerardo Cortina

Good morning, Doug

Doug Weiss

Good morning. So, reading between the lines, it seems like it wasn't obviously it is a bad stretch for all your commodity businesses, all your resource businesses, it seems like you might have been a somewhat more difficult quarter for your supply chain business than a year ago, is that true?

Gerardo Cortina

Well Doug our business is very much related to the steel industry. In our supply chain, I would say that approximately 50% is related to steal and as you know the world steel industry is going through very difficult times, they suffer production falling prices and that in all the different products that we are there is increased competition oversupply and of course this has affected our margins. So, for these reasons we are taking very active, we are very active in reducing our inventories, reducing our receivables, but also looking at our cost structure we have made some important improvement in reducing our cost as seen today, in today's market the only way that we can be profitable is being a low cost supplier.

Sam Morrow

And one thing I will add to that Doug is, certainly some challenges in a couple of areas that we serve, but challenges also create opportunities especially from a finance standpoint. So, I think a couple of negatives, but a couple of positives as well.

Doug Weiss

On the banking initiative, is it correct to think, you obviously have a lot of cash on the balance sheet, one of the key objectives here to create an investment opportunity for that cash or you can get better returns and you would otherwise be able to get on it.

Gerardo Cortina

What we want to - we have a very extensive customer base worldwide and the opportunity that we see is to provide additional services to our customers and the way to do it is by having a bank and being able to offer all the services that I talked about just a minute ago and this way we will be able to improve on a margin profile.

Doug Weiss

So I guess, more specifically when you factor a customer receivable are you going to be, are you incurring credit risk on that or are you somehow uploading that credit risk?

Sam Morrow

So group wide we are, I would say risk averse when it comes to credit risk, without additional protection beyond just the credit risk with the customer we wouldn't offer payment terms. So, in circumstances factoring receivables there would always be some type of additional protection above and beyond the credit risk of the customer.

Doug Weiss

And then on Wabush, I think your strategy had been to just hold that long-term as productionality, is that still the strategy or are you - you’ve reclassified the discontinued, so is that just accounting or is there a change in strategy there?

Sam Morrow

No, we have discontinued these assets and we're being very prudent here. This is a good asset in a very difficult industry, but there is nothing that we can really do until the CCW proceedings conclude. So, we're looking forward to that date and that's really the next step in rationalizing that interest.

Doug Weiss

All right. Okay. I’ll get back in the queue. I’ll let other people ask questions. Thanks.

Gerardo Cortina

Thanks, Doug.

Sam Morrow

Thank you.

Operator

[Operator Instructions] Our next question comes from Rich Rogers, a Private Investor. Please go ahead.

Unidentified Analyst

Hi, good morning guys.

Gerardo Cortina

Good morning.

Unidentified Analyst

Sure. The first question I had is, last quarter we had a net cash to debt position and we got a positive 15 million, what is it now?

Sam Morrow

95 million.

Unidentified Analyst

So, it’s positive 95 million now?

Sam Morrow

We have net cash of $95.9 million as of September 30, 2015.

Unidentified Analyst

Okay. When I looked at the, my notes I think there was a working capital decrease by $100 million and something else was a negative by $100 million, so it looked like $200 million financially behind you were last quarter, am I misreading that?

Sam Morrow

We reclassified a couple of assets to long-term and we reclassified a couple of assets to assets held for sale as part of discontinued operation. The assets that we had previously held for sale we also took non-cash impairment on - those were hydrocarbon properties. So, there would have been a slight decrease, but we haven't, I wouldn't call it a negative.

Unidentified Analyst

Okay, so if you added everything again so it’s apples to apples where will we stand, now that you related all those discontinued operations back in, what would our net cash to debt be now?

Sam Morrow

I haven't done that calculation in that way Rich, but I can get back to you.

Unidentified Analyst

Just a ballpark, that's actually extremely important because that shows your financial position, your financial situation, you must - have we lost about [100 million] dollars over the quarter?

Sam Morrow

Sorry, you're talking about cash?

Unidentified Analyst

No, no. I know what cash, but the net cash to debt, if you head back into discontinued operations, are we substantially parse off..?

Sam Morrow

There is about $50 million of debt in [Technical Difficulty] and there is a very nominal amount of cash. So our net cash position would be reduced by about 50 million so to say it is 55 million instead of the [95.5]earlier.

Unidentified Analyst

Okay. So, when you add everything back in that only takes away about 45 million between the cash and the debt if you - with the discontinued operations you add up the debt and the cash, it only knocks out 45 million to our current $95 million positive position.

Sam Morrow

It adds 50 million of debt into that equation.

Unidentified Analyst

Still 50 million bucks, approximately.

Sam Morrow

Yeah.

Unidentified Analyst

Okay, that’s not so bad, that’s good and so is that correct?

Sam Morrow

Yes.

Unidentified Analyst

Okay. And so, with the hydrocarbon assets I know there’s about $168 million decommissioning, potential liability there, are there a set of assets or a pool of fund set aside, will you acquire those assets or is it something that we’re going to have to potentially payout in cash down the road?

Sam Morrow

So, those decommissioning obligations relate to the amendment reclamation of all of our hydrocarbon properties. The way that the Alberta oil and gas regulations work is there’s no cash deposit required up front. There’s a ratio of production that you have to maintain. It’s production to liabilities that you have to maintain on a go-forward basis. So, the average duration of those liabilities is 13 years or 14 years, so it’s a very long term and we would anticipate with any rationalization of those assets that the liability would be taken by whomever that purchaser maybe.

Unidentified Analyst

Certainly [indiscernible], but we can’t rationalize the value that [indiscernible], you are on the hook for 65 million or so?

Sam Morrow

I don’t think the number is actually quite that high.

Unidentified Analyst

It says 164 million.

Sam Morrow

That 165 million, which is the assets held for sale, sorry the liabilities related to the assets held for sale includes decommissioning obligations, as well as some current liabilities and the long-term debt associated with those assets. So, the liabilities related to the assets held for sale that’s not decommissioning obligations ended up itself the way it used to be.

Unidentified Analyst

I see the same, but the whole liability is how much again, 164 million?

Sam Morrow

That’s all of our liabilities related to the assets held for sale.

Unidentified Analyst

I got it. Have you ever had an offer of even $20 million for those assets?

Sam Morrow

So, with the 19 properties we were actively marketing those and we engaged an advisor, we received a couple of offers on those assets, but none of which met our criteria and the other assets we’ve been more passively marketing up until September and now we’ve initiated an active program and we have a couple of interested parties that we’ve been discussing with already. So, we’re quite confident in the valuation of those assets on the balance sheet and our capabilities of being able to rationalize those within the next 12 months.

Unidentified Analyst

Sure, you mentioned, y our main goal is conserving cash and that’s why we eliminated the dividend and didn’t do any buyback at this point, but then when I read that circular I saw your total compensation for the management team is going up above 30% because you gave yourself some more title, just was trying to figure out how we can rationalize that and be comfortable with that?

Sam Morrow

[indiscernible].

Unidentified Analyst

Sure. No, that circular that you put out about a few months ago, I was looking at the total compensation for the management team per person and it looked like it went up above 30% or so and I know we’re trying to conserve cash because we cut the dividend and we’re not doing any buyback, but the stock’s been really cut in half almost since the last time we spoke, but the income of the people running the company have gone up substantially because of additional titles added to their other [details].

Rene Randall

It wasn’t titles I mean, Sam was promoted to CFO, I mean and Mr. Gerardo came on also, so it wasn’t just a title change.

Unidentified Analyst

Yeah, last year Mr. Gerardo I think was CEO, wasn’t he?

Rene Randall

Excuse me?

Unidentified Analyst

[indiscernible]

Rene Randall

Yeah, we haven’t had any recent changes.

Sam Morrow

It was the middle of 2014. So if you looked that 2014 to 2013 change, yeah and the circular information would have been about 2014.

Unidentified Analyst

Yeah. Well, that circular just came out in 2015 and other one went over the --

Sam Morrow

Yes, the circular that came out in 2015 was about 2014.

Unidentified Analyst

Okay.

Sam Morrow

[indiscernible] 2014. So that would explain the majority of that change.

Unidentified Analyst

Yes, I mean...

Sam Morrow

So, we are actively creating cash. I think what Gerardo mentioned earlier was we’re reducing our accounts receivable and our trade receivables, we’ve been successful with that project to date and we have some more room there, same with our inventories. We have an active program in place which we’re going to be generating additional cash there. So, when it comes to your question on a buyback, we said this last quarter as well, our focus with capital allocation is to put all of the capital into the bank near-term. We want to close the bank and then after that I think that there is a very healthy discussion that we will have with the board about whether or not a share buyback is appropriate at that time, but it’s definitely on our minds.

Unidentified Analyst

[indiscernible].

Gerardo Cortina

Regarding expenses, as we mentioned SG&A has come down and our sales expenses, we have been working in streamlining our operations, we have consolidated some of our sales offices, especially in Western Europe, so we’re taking a very close look at the expenses as I already mentioned, I mean we have to be able to be profitable even in these current market conditions.

Unidentified Analyst

Yeah, I just saw the cash reallocated towards people’s salaries and benefits rather than anything to do with shareholders, so I mean is it, is it all pretty self-evident, $2.36 a share with $147 million market cap, I know the market is very difficult, but this has absolutely no sign that there’s any hope for shareholders and every decision made is in total contradiction to the benefit of the shareholders and then maybe someday soon you’ll just spring it on us that boom network [indiscernible] on shareholders that it may workout, but the last three years it has been about past trying anyone’s patience, it’s just, you keep hoping that at some point there’ll be some focus to shareholders and certainly has not come, and now we are in the [indiscernible] begins with a 2 and potentially could begin with a 1 and I think that’s game over. So, I mean...

Sam Morrow

We’re very conscious of this. One thing I will say is Gerardo and I were named to these posts not three years ago, 18 months ago and we spent a good about of time developing a strategy which is going to return MFC to long-term profitable and sustainable growth. So, we’re very conscious of where our share price is and right now all of our capital is going to be reallocated into the bank and once we pass that regulatory process and once we close that acquisition, we’re going to very seriously look into a share buyback because we think that that is potentially a good use of our capital. So, I think...

Unidentified Analyst

I assume you have been saying that for about 2.5 years, but the actions speak obviously louder than words. If I was running...

Sam Morrow

So, we haven’t been saying that for 2.5 years, we’ve been saying that for 18 months, which is when we’re put in these positions and again I understand very clearly where you’re coming from and Gerardo is a shareholder, I’m a shareholder, a lot of us have a vested interest in this company going forward and we are looking for long-term value creation and that’s really where our goal is at this time and we’re very confident that we will be able to achieve these goals that we have set forth.

Unidentified Analyst

If you were on the basketballs head came in the last place every year and you just continue to come at last place, would you increase the salaries of the coach or would you decrease or let the coach go?

Rene Randall

We’re not running a basketball team Richard.

Unidentified Analyst

Well, it is a corporation, everyone’s held the standards, I’m held the standards and clients firing me because of MIL, so it’s just - it all doesn’t add up, so I just want to put...

Rene Randall

Richard, you have to understand, it’s been a very difficult market that we are in. I mean...

Unidentified Analyst

I know I agree...

Rene Randall

If you look at the industry --

Unidentified Analyst

Yeah, your ratios are substantially better than anyone else in the sector so therefore you, any company I think with management that is, hasn’t even inclined due to shareholders would have their stock bid at a somewhat legitimate level, you would support it at some given level, by a dollar a share, at book value or a little bit in book value. That’s what I would do as a manager I guess. I just learn different management styles and how they will act towards given market conditions. 30 million in the bank, letting you start trade at a $147 million market cap, it just doesn’t all add up and it is always a promise for the future. People, three years later that’s a long time to ask them to wait. So, I will get of the call and I will let you guys take some other ones.

Gerardo Cortina

Thank you, Richard.

Rene Randall

Thank you.

Operator

Our next question comes from Gregg Abella of Investment Partners Asset Management. Please go ahead.

Gregg Abella

Good morning guys.

Gerardo Cortina

Good morning, Gregg.

Sam Morrow

Good morning.

Gregg Abella

So, I share some of the frustrations from the previous caller and it sounds like you guys do to, one of the problems I perceive here is that you are in the transition to a new strategy, but with the strategy and the timeframe maybe haven’t been communicated to Wall Street effectively, so to what degree have you been going to investment conferences, making presentations to Wall Street, there was a small flurry of activity, it appeared like maybe six months ago, and I don’t know if you’ve continued that effort or just abandoned it for the time being, but …

Rene Randall

No, what we’ve done is just slowed down right now, because we are in the process of getting the bank, we have a non-disclosure agreement. So, for us to just go on the road and say while we comment on it, we felt just really wasn’t appropriate, so we want to wait to be able to close the bank so that we can actually talk about it.

Sam Morrow

In retrospect it was probably a bit pre-mature when we went on the road in May. We have a lot of very exciting things that are going on within the company, but until we have the banks there is only so much we can really say and we can really show. So, I think we are very conscious of improving our investor relations, but the next step towards all of these things really aligning is acquiring the bank.

Gregg Abella

And you are confident that’s going to close, I mean we are running out of time in 2015. So, you are confident that that is [more important].

Gerardo Cortina

That’s the information that we have, yes.

Rene Randall

We’re still confident.

Gregg Abella

What sort of things would delay that? Like the regulator issues or?

Gerardo Cortina

We don’t know of any issues that can delay it at this point.

Gregg Abella

Okay and as you contemplate a buyback after you’ve closed the bank transaction and you figure out what sort of capital you are going to need to run the business and how much excess capital there is? Is there a size or range that you would have in mind? Is there a percentage of the stock that you would buy back at levels like this, and if it were me, I would buyback every share I could, but…

Gerardo Cortina

No, I mean we don’t have a specific plan at this time, but we will certainly consider a buyback as we have already mentioned.

Gregg Abella

Have there been, since you’re trading at such a steep discount to book, any overtures from any competitors in this space to simply buy MFC?

Rene Randall

No. None that we’ve heard about.

Gregg Abella

But if someone were to come along at a reasonable price, you would consider it?

Rene Randall

We would always consider it.

Sam Morrow

There is a process in place for anything like that, in which we would take it to the board and you know certainly discuss everything right, but if that would require approval from a small number of shareholders that own a very significant amount of stock. And I think at this point we are confident in our strategy going forward and we think that over the long term the value of MFC as a standalone company has a lot of viability.

Gregg Abella

The concern is that before you even get to the goal line with the bank, I mean the lower your stock trades the easier it is to take you over. So, you’re jeopardizing the independence of the company by letting it [drift more]?

Sam Morrow

Yeah, but remember we’d have a couple of very supportive shareholders who are long-term shareholders who have had a lot of support and insight into what we’re doing and where we’re going to taking this company in the longer term. So these aren’t stakeholders that have a near-term view and again we really do think that over the long term the value of MFC is certainly higher than we’re seeing today. certainly

Gregg Abella

Just last question, let’s assume you’ve closed the bank, you must have some sort of projections as to what sort of earnings you can make on the new line of business or you wouldn’t do it right?

Gerardo Cortina

Well, as we mentioned, our gross margin today is at 7.3%. To get to the level where we want to be we need to increase our gross margin up to minimum 10%, so we have 3 points that we have to increase the gross margin and that’s our objective and the only way we can see in today’s market to reach this objective is by providing additional services to all the customers and that’s what we’re looking at.

Sam Morrow

And we did say that our corporate goal is to have a 15% return on equity and with the bank we believe that we can get there. Because of the regulatory process we can’t go into too much more specific detail on the bank itself, but corporately 15% ROE is where we believe we can be and where we need to be.

Gregg Abella

With that sort of return on equity either not only a buyback, but you could probably afford to pay out a dividend, let’s get the bank closed first and then we can have more conversations about how best to reward shareholders because that’s where I would agree with the previous caller, we’ve have been patient and it’s not yet been rewarded, but hopefully sooner or rather than later we’re going to have some results we can all be proud of.

Gerardo Cortina

Yes.

Rene Randall

I agree.

Gerardo Cortina

That’s what we are looking at, yes.

Gregg Abella

Thanks guys.

Rene Randall

Thank you.

Gerardo Cortina

Thank you.

Sam Morrow

Thank you.

Operator

Our next question comes from Sam Schaefer of Global Value Research Company. Please go ahead.

Sam Schaefer

Hi guys, thank you for taking my question.

Gerardo Cortina

Hello.

Sam Morrow

Good morning Sam.

Sam Schaefer

I believe in March when we were talking about the assets that are held for sale, I believe the net assets were about 120 or that might be at the beginning of the year so March went about 105, 110, and there was stock of a $2 per share ROP to be realized within 12 months to 18 months after all of the new assets added and liabilities added against those assets held for sale can you really just provide some color on what’s going to happen in the future with the ROP?

Gerardo Cortina

Well, as I mentioned already any potential distribution will depend on the rationalization process of our hydrocarbon assets and this will depend on the timing and the amount and at this time, I mean we cannot give you any assurance on the timing or the amounts that we can - of such distributions.

Sam Morrow

The other thing I’ll add to that Sam, so the energy industry in Calgary in particularly has deteriorated and it’s in complete disarray, so early on the year spot prices fell, but the future’s curve didn’t decline to the same degree and it wasn’t until the third quarter that the long-term price curve decline started accelerating. So, this has two impacts. Firstly, the price forecast we used to calculate future revenue is lower, but secondly the additional uncertainty in the industry justifies a higher discount rate for the present value calculation. So, the combination of these two factors resulted in a non-cash impairment during the third quarter. So, we don’t see any changes to this industry near-term and even in the medium-term, so we’re being prudent, we’re moving forward and we’re working very diligently towards our goal to become a premier trade and structured finance and banking institution.

Sam Schaefer

So, if you received I believe it’s net 47 million or just shy of 47 million for the assets held for sale, is that still going to be returned to shareholders if that full amount was received?

Sam Morrow

So what Gerardo mentioned earlier Sam is that after the non-cash impairments which we incurred in the third quarter, we do not expect to return capital from this process at this time but we continue to evaluate all of our options and we will keep you updated as this progresses.

Gerardo Cortina

These are ongoing process, so once we know how it is going to go we will definitely keep you updated.

Sam Schaefer

And then when shareholders expect to see more information regarding the bank, it won’t be available once the dealers close or when we start to see more information before that happens?

Sam Morrow

No, we will – you will only receive the information once the deal is closed. And as we said we expect to have it closed by the end of the year, before the end of the year.

Sam Schaefer

Okay. Thank you.

Sam Morrow

Thank you.

Gerardo Cortina

Thanks, Sam.

Operator

Our next question comes from Jeff Geygan of Milwaukee Private Wealth Management. Please go ahead.

Jeff Geygan

Thank you. Good morning, gentlemen. Appreciate your time here.

Gerardo Cortina

Hello, Jeff.

Sam Morrow

Good morning, Jeff.

Jeff Geygan

Sam - you, Rene and I met at New York City sometime ago and I believe we discussed potential return on equity of roughly 15% which seem like a reasonable statement. However at that time your equity was 650, today your equity is roughly 350, you’re still sticking with the 15%?

Sam Morrow

At least 15%.

Jeff Geygan

Fair enough. Can you please describe with some specificity how you anticipate generating roughly $50 million which would be 15% on your equity today?

Sam Morrow

So, as Gerardo mentioned earlier, with the overlay of banking and financial services on top of the supply chain platform that we are showing, we think that we can increase our gross margins materially. So I think Gerardo you said at least 10% on a gross basis?

Gerardo Cortina

Yes.

Sam Morrow

And then that would all drop to the bottom line. I think that’s really the key. So the overlay of these banking and financial services will increase our margin profile and then that will in turn increase our returns on equity.

Gerardo Cortina

Yes, I would like to add that, as you can see in our 6-K, we have diversified our revenue by product. We are in different products. We are in different geographies. In the EU, we have about 30%, we are in the Americas, we are in Asia and we have a substantial customer base and especially in some parts of the world our customers do not have the necessary financing or they have high cost financing and that’s where we see an opportunity to improve our margins.

Jeff Geygan

I see. Thank you. And just as a forward view for all shareholders, the measure of your success will be evident than through expanded gross margins?

Gerardo Cortina

That we have to start by improving on the gross margins. Yes, that’s the beginning.

Jeff Geygan

Okay, good. Good luck. With that, I appreciate it. Thank you.

Gerardo Cortina

Thank you.

Sam Morrow

Thanks, Jeff.

Operator

Our next question comes from Michael Epstein of Northeast Securities. Please go ahead.

Michael Epstein

Thank you, gentlemen. Good afternoon or good morning I should say in early Vancouver. Instead of having this as discontinued operation, why can’t you spin it off as a separate company and accelerate your banking operation? And the second part of my question, what happens at year end if we don’t get approval? What’s the game plan of management? Is there any viable plan here? We seem to be waiting such as a long time to get approval from whichever regulatory agencies that has to do this?

Gerardo Cortina

Well, Michael, getting approval takes time. It’s a long process. We have been working very diligently on this and all the information that we have is that we will get approval before the end of the year. So there is no reason to believe that these point we would not get it and that as we have mentioned several times throughout the call, that’s a very important step in our plan.

Michael Epstein

Okay. And haven’t spinning off this discontinued operations into a separate company so we get a pure play on a more timely basis. Sam, can we do that financially?

Sam Morrow

So, we are looking at a lot of different options here. There are certain limitations about spin outs that need to be considered but we have a lot of options on the table. Right now, we think the most viable of those is actually just the straight rationalization. But I can promise you that these discussions are happening at the board level and we’ll keep you apprised of any developments or if anything changes.

Michael Epstein

I hear that the value of these assets have diminished significantly and there is not easy sales, so this could be an overhang for an extended period of time. Are the management really addressing these issues on a timely basis for shareholders?

Gerardo Cortina

We certainly are. I think we put these into discontinued options, we have an active plan to rationalize these assets because we want to become a focused and pure play structured and trade financing banking institution. So right now we are emphasizing prudence and we are working very diligently to see these projects through, but I wish I had I would say a harder update for you today but this is where we are at this time and we are working very diligently to ensure that we can rationalize these assets in the near term.

Michael Epstein

Okay. Now you have a very highly disgruntle shareholder base here who have been expecting things to happen and they’ve been very disappointed over extended period of time. Is management aware of that?

Sam Morrow

We certainly are.

Gerardo Cortina

And we are very disappointed to and we are not happy with the soft prices. As Sam pointed point that we are shareholders also.

Sam Morrow

And Michael, working on this takes time but we are very confident that our plan will show in the – starting next year, the resource that we are looking for.

Michael Epstein

Are there any other assets that we can sell to – it’s a possibly buyback shares. I think you have a Chinese operation and other operations that we could sell and expedite the purchase of shares.

Gerardo Cortina

At this time, Michael, our focus is on this bank and become a premier trade and structure finance company. So that’s really what we’ve done is, we discontinued the operations. We don’t think are really the ones that we’re going to use going forward and I think until we close this, we really not going to look at moving other assets.

Sam Morrow

The other thing I’ll say is we mentioned some targets earlier for our inventory and trade receivables. We’ll generate more than $50 million from our inventories and trade receivables before the end of the year. So I think that we are seeing a good amount of improvement in cash generation and we’ll reallocate that to the bank. And then once we close the acquisition of the bank, we are going to very seriously revisit the potential for a share buyback which it’s on our minds and we are very understanding of your frustration.

Michael Epstein

I’ll pass it on right now but thank you.

Gerardo Cortina

Thank you.

Sam Morrow

Thank you, Michael.

Operator

Our next question comes from Joe Pratt of Stifel. Please go ahead.

Joe Pratt

Hi, good morning.

Gerardo Cortina

Good morning.

Sam Morrow

Good morning, Joe.

Joe Pratt

Good morning. Maybe this is not even asked but for the first, second and third quarters, could you tell us what the EBITDA numbers have been from continuing operations?

Gerardo Cortina

Just a second, Joe.

Joe Pratt

Okay.

Sam Morrow

I don’t have that in front of me, Joe. So it was $5.5 million for the three months ended September 30, 2015 and then it was $27.7 million for the nine months but I can get to the detailed breakdown.

Joe Pratt

Okay. And as I recall, the EBITDA in the March and June quarters I think it was approximately $13 million before the accounting change for the discontinued operations, is that approximately correct?

Sam Morrow

So it was about $13.5 million in June and it was slightly higher than that in March, it was maybe $20 million in March.

Joe Pratt

Okay. Thank you very much.

Sam Morrow

So that’s not from discontinued operations, that was previously reported just to confirm.

Joe Pratt

Right.

Sam Morrow

Yes.

Gerardo Cortina

Thanks, Joe.

Joe Pratt

Thanks.

Operator

Our next question comes from Greg Wendt of Morgan Stanley. Please go ahead.

Greg Wendt

Good morning everybody.

Gerardo Cortina

Hello, Greg.

Greg Wendt

In the trades receivable area, is there any other data you can give us as far as how much if any of that is past due or slow pay?

Sam Morrow

So it’s not something that we disclose on a quarterly basis. We do on an annual basis. I know last year there was actually quite a jump in our overdue receivables just because of the acquisition of these two companies. One of them had some receivables with additional protection beyond just the normal credit risk which we were quite comfortable with. So there is, whenever there is any issue of I would say material issue credit risk, we would just impair that receivable which is why you’ve seen credit losses in our cash flow statements every so often. But right now there is nothing within that pool that picks out and the aging we are quite comfortable with. And whenever there is a receivable that has some type of significant aging profile, it’s because we have some instruments on top of just the normal credit risk of the customer to protect us.

Greg Wendt

Okay. And then the second question in the inventory section, the part that’s been fixed or price hedge and then you have other. Do you all look at your inventory and price it to market on a quarterly basis or in other words you use first-in first-out or last-in first-out, how as shareholders? I guess what I’m trying to get here is with the decline in commodity pricing, one might question whether your inventory is reported at current market prices or if it’s under water?

Sam Morrow

So we mark-to-market our inventories on a quarterly basis so we treat them as broker trader inventories which is fair value as cost of sale on a quarterly basis. So that’s marked to current market prices. When we say that it’s contracted at a fixed price that means we have a contract in place from a third party, it’s just that risk hasn’t transferred yet. So we haven’t been able to invoice that inventory. So our other inventories, there is raw materials which are also mark-to-market and then work in progress and finished goods that are production facilities. So those would have some embedded markets within those amounts. So there is no discomfort from our side.

Gerardo Cortina

And I would like to add that we do not have and we will not have in the future any long position on our inventories. As Sam has mentioned, 60% are contracted of fixed prices or hedge and the balance its work in progress and goods in transit, these type of materials.

Greg Wendt

I mean just asked is it going forward? Is that mean that that’s where we are today, Gerardo is that…

Gerardo Cortina

No, what I said is that we do not have today any long positions and we will not have in the future any long positions.

Greg Wendt

That’s great news. Thank you.

Gerardo Cortina

Yes.

Sam Morrow

And just to be clear, we do mark-to-market for our commodity inventories with broker trader accounting and then everything else is on a FIFO basis. And if you take a look at our cash flow statement, you will see but I think the quarter was about $2.5 million loss on just the mark-to-market of some of our inventory. Some of that just have to do with compressing margin. So when you have the same notional amount of inventories but a smaller margin, you would show mark-to-market loss which is non-cash.

Greg Wendt

Okay. I want to congratulate you all for stepping up and making a what will – it was an obvious decision I thought but for the revaluing of Wabush and the resource assets that we like to see that but when people look at your book value at leasing going forward at least we have a sense of where at least in my opinion where possibly the bottom is? As far as other shareholders suggesting at the spun off, these are not going to have an impact going forward if you’re successful in getting the bank. They are just a call option in the future that you might recognize some value. Am I correct there?

Gerardo Cortina

Yes. Our plan today is to get the bank and work in offering all these new services to our customers. And I think you’re correct. Our hydrocarbon assets and iron ore assets are not our core focus today, and we just have to wait. As Sam mentioned, I mean, especially around [indiscernible] on their CCAA and there is nothing that we can do at the present time. So we will concentrate in our business and really working on improving our margin profile with the plan that we have in place.

Greg Wendt

I think part of the stock price also has to do with at least now you’ve removed some of the overhead with the revaluing of these assets but the acquisition of this bank in which you’ve been not been able to share additional information. And I’m going to ask a couple of questions. I don’t know whether you can tell us or not but is this bank that you’re acquiring, would you consider this fix or upper or problem bank that has to be fixed, or do you basically get your bank license and you’re ready to start the business?

Sam Morrow

So what I think we said last quarter was that it’s not important what we buy, it’s important what we build. So this is an emerging banking transaction. This is an transaction which were acquiring a distressed company by any means. We are purchasing a bank. We’ve submitted an application to the relevant authorities with our plans for that I think on a go forward basis which shows that we intend to become a premier structured and trade financing banking institution. So I wouldn’t – we are limited in what we can say about this project but I think we should be thinking a bit as almost a Greenfield.

Greg Wendt

Okay. So if you think about the United States where I’ve got some exponential banks, when they start up generally they don’t make money right away if you’re a Greenfield or start-up. Do you expect the bank to start making money in the first year or?

Gerardo Cortina

Our plan Greg, as we have already mentioned, we have a very extensive customer and supplier base, and we see a lot of opportunities to offer these customers and suppliers, all these financial services and these we can start right away. Of course I mean it will be a – there will be a process and it will take some time, but we will be able to start right away because we have already the customer base and the services that we will offer them.

Sam Morrow

So some of our customers have asked us to be able to provide these services, and I don’t necessarily view the regulatory processes as a burden right. It’s given us an opportunity to really make sure that when we close on this acquisition, we are running.

Greg Wendt

Okay. if we were trying to find that comparable out there, is there a public comparable as to how you envision this business going forward? Likes this [ph] a competition?

Sam Morrow

So we wouldn’t call it competition because it’s a different market but one company that we had a lot of respect for is Bladex, it’s BLX on the NYSE.

Greg Wendt

Sure. I know Bladex Panama [indiscernible] that dollars?

Sam Morrow

No, it’s a Panamanian bank, very much involving finance in Latin America.

Greg Wendt

Right. So if you were to model where you think you’re going that you like to be somewhat like a Bladex.

Sam Morrow

We have a lot of respect for that company and there would be certain differences between what we are trying to do but I think that’s the most apparent comparable in the public markets today.

Greg Wendt

Okay. So I guess a comment and then a request possibly. So actually your story will be – it sounds like your story is if you were in the United States and you are starting a bank in 2008 right after the financial collapse. It’s kind of where you’re taking the company today where that’s a Greenfield bank. You’re starting at a time when there is a lot of disarray in the market and the commodities market and you have the – it sounds like to me you have a great opportunity and that gives ultimately the commodity and the trade markets will come back. It’s probably the – it looks like one of the worst times. My request is, when you go close as bank, do you think you can have a conference call and then maybe provide more information to us and give us more detail or is that not going to be possible?

Gerardo Cortina

No, I think we will consider that Greg. I mean as I already mentioned, we are very confident that this will be closed before the end of the year. So starting in the year we will be working very hard on these and we will certainly keep you informed.

Sam Morrow

And just the other thing I’ll mention, so we see Greenfield but in reality we do have a lot of experience in the sector. Our team in Vienna led by Mr. Ferdinand Steinbauer has done just a phenomenal job in structured supply chain solutions in the past 10 years. So we do think that we’re going to start running and we do have a platform already in place to offer these services. So we will definitely take your comment into consideration. I think there is always going to be a certain amount that we are unable to disclose but we are working on improving our transparency to the extent that we can and I think we’ve made a couple of important improvements to date and we appreciate your suggestions for sure.

Greg Wendt

Yes, they would be helpful as far as existing shareholders or new shareholders that might look. The suggestion that you are like Bladex or other banks and how big the market is, how fragmented it is, if you can share those guys I think after the transaction. Thanks for all your hard work.

Gerardo Cortina

Thank you, Greg.

Sam Morrow

Thank you, Greg.

Operator

Our next question comes from Raymond Hau [ph] of Comprehensive Financial. Please go ahead.

Unidentified Analyst

Good morning guys.

Sam Morrow

Good morning.

Gerardo Cortina

Good morning.

Unidentified Analyst

Who at MFC is heading up the asset rationalization?

Gerardo Cortina

Michael Smith.

Unidentified Analyst

That’s kind of what I figure. That’s why - he is also handling the hydrocarbon, I know he was involved with Wabush.

Gerardo Cortina

He has been an important contributor to that process, yes.

Unidentified Analyst

Okay. Are you still looking – I know in the last call I think you talked some creative solutions. Are we still looking at some non-traditional type solutions there? Has that focused more to an outright sale of those assets?

Sam Morrow

We are keeping all of our options open and I think even innovative transactions in today’s market very difficult.

Unidentified Analyst

Right.

Sam Morrow

I think that industry is in complete disarray. So we are keeping all of our options open but we are very – I can promise you we are working day and night to see this.

Unidentified Analyst

Assuming everything gets cleared up on the Wabush bankruptcy, what are our holding cost in the interim for both the hydrocarbon and iron ore assets just sort of the hard cost of holding those in the interim?

Sam Morrow

I don’t have that exact number in front of me but I can get back to you on that, Raymond.

Unidentified Analyst

Okay. And I think I read where you’re looking – the fee rate is also included in that rationalization plan?

Sam Morrow

Yes, it is.

Unidentified Analyst

Is the –are you looking along with ever DSO in the whole thing or just your half?

Sam Morrow

Again I think that there is a number of options on the table and I think both could be there.

Unidentified Analyst

Lastly, in your little mini balance sheet that you had in the press release, you had $152 million of other assets. Can you give a breakdown of some of the – preferably the majority of those and the value accordingly? I know the China Healthcare, the Blue Earth assets and sort of what those are valued at?

Sam Morrow

This is the other long term asset?

Unidentified Analyst

Yes.

Sam Morrow

So part of that would be the real estate which we reclassified from both real estate held for sale and assets up for sale, and we have the power plant in Uganda. We have the power plant that we recently commissioned in Calgary and then we have our…

Unidentified Analyst

Can you give us some values on those that, rough values?

Sam Morrow

Sure. So to say, real estate held-for-sale is about $40 million and the power plant at Uganda is about $25 million, the power plant in Calgary is about $25 million. So we have equity method investments in China, that’s about $10 million. We also have some deferred tax assets which is about $20 million and I can send you a detailed breakdown if you like.

Unidentified Analyst

Okay. That would be great. That’s all I’ve got. Thanks.

Sam Morrow

Thank you.

Operator

This concludes our question-and-answer session. I would now like to turn the conference back over to Gerardo Cortina for any closing remarks.

Gerardo Cortina

Thank you. Thank you all for joining our call today. We have significant opportunities in structure finance. As we mentioned we are very confident that we will be concluding and getting our license to operate a bank before the end of the year and there had been some important changes, but we are looking at our future. Our strategic focus is trade and structure finance and banking, and this way I have mentioned several times throughout the call will be the way to improve our margins and get back to the level of profitability that we are looking for. Thank you very much and good bye.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines. Have a great day.