Is Longwei Petroleum (LPH) overstating its inventories?

In the form 10K for the Fiscal Year ended June 30, 2012 (link here), the Company reported Inventories for about 52.619 Millions USD

Inventories

Inventories consist of finished petroleum products. Inventories are stated at the lower of cost,

selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale.

In the form 10K for the quarterly Period ended June 30, 2012 (link here), the Company reported a total inventories level of 50405 Metric Tons, corresponding to a utilization rate of approximately 40% of its total capacity of 120000 Metric Tons1.

For our analysis we neglect Fuel oil and Solvents Inventories. Therefore the Total Inventories relevant for the analysis amount to 48872 Metric Tons.
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By making such a statement, the Company implies that the 120'000 Metric Tons disclosed Capacity (before the Hujiae Acquisition) refers to the one-time storing Capacity (i.e. it implies that the Tanks at the Gujiao Facility and the Taiyuan Facility are able to store 120000 Metric Tons).

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determined on a weighted average basis, or net realizable value. Net realizable value is the estimated

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Converting Diesel Metric Tons into Cubic Meters (M3) Volume. Petro-diesel density (average) = 0.84g/ml (= metric tonnes / m3). Source: NC State University (here) Metric Tons (mt) 26,254.00 US Gallons 8,100,000.00 Cubic Meters 31,254.76 USD Millions 26.40

Disel

Converting Gasoline Metric Tons into Cubic Meters (M3) Volume. Gasoline density (average) = 0.73g/ml (= metric tonnes / m3). Source: NC State University (here) Metric Tons (mt) 22,618.00 US Gallons 8,100,000.00 Cubic Meters 30,983.56 USD Millions 26.40

Gasoline

Computing the Total: Metric Tons (mt) 26,254.00 22,618.00 48,872.00 US Gallons 8,100,000.00 8,100,000.00 16,200,000.00

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Cubic Meters 31,254.76 30,983.56 62,238.32 USD Millions 26.40 26.40 52.80

This means that at LPH Gujiao and Tayiuan Facilites, the Company needs to have at least 62238.32 m3 Storage Capacity.

This corresponds to a large storage tank with a radius of 27.058 meters and a height of 27.058 meters.

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27.05 54.12 m

Disel Gasoline Total

27.05 m

Now, imagine for a moment to put such a tank, full of fuel, at the Taiyuan Storage Facility. This is how the facility would look like:

As you can see, such a hypothetical tank, would cover the entire area where the (8) tanks at the Taiyuan facility are located. It will also be at least 27.05m high.

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Another way to look at the volume needed to store the inventories (per SEC Filings) at the two LPH facilities (June 2012), is to look at the total area covered by the various tanks at the two facilities. The Total Area Covered by the (8 green) tanks at the Taiyuan Facility is approximately 880 m2.

The Total Area Covered by the (8 green) tanks at the Taiyuan Facility is approximately 730 m2. We have not considered the 4 tar storage tanks.

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The total area covered by the tank at the two facilities is therefore 1610 m2 With a base of 1795 m2, a hypothetical storage tank with a 62238.32 (level of inventories at June 30, 2012), need to be 34.67 m tall.

m3 Storage Capacity

As a consequence, on average, to be able to store the disclosed inventories level, all the tanks at the two facilities of Longwei Petroleum, should be at least 34.67m tall,

Here is a simulation on how the two facilities should look like in order to be able to store the disclosed Inventories Levels.

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The disclosed Storage Capacities at the two LPH Facilities become even more unbelievable when we look at how tall the tanks should be in order to be able to store the disclosed potential Capacities. The 8 tanks at the Gujiao Facility Cover an area of about 815 m2. The disclosed storage capacity at the Gujiao Facility is 70000 MT. 70000 MT correspond to about 70000 m3 (simplification). Therefore, if this volume is spanned on a surface of about 815 m2, the resulting average height (necessary) of the tanks is about 85.89 m. This is the simulation result:

The 8 tanks at the Taiyuan Facility cover an area of about 980 m2. The disclosed storage capacity at the Taiyuan Facility is 50000 MT. 50000 MT correspond to about 50000 m3 (simplification). Therefore, if this volume is spanned on a surface of about 980 m2, the resulting average height (necessary) of the tanks is about 51.02 m. This is the simulation result:

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The following Pictures show that the tanks at the Taiyuan Facility are not higher than 20 Meters.

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6 steps
If we assume that each step is 30cm high, the 6 smaller tanks at the Taiyuan Facility would be about 14 meters High! 7

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about 23 meters High!

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1/2 38 Steps
If we assume that each step is 30cm high, the 2 large tanks at the Taiyuan Facility would be 8

The following Pictures show that the tanks at the Taiyuan Gujiao are not taller than 20 Meters.

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Measuring the Radius of the tanks at the Taiyuan Facility

An indication of the size of the Tanks, can be seen from comparing the size of the two trucks parked in the parking lot with the site of the tanks depicted in the picture.

The radius of the larger Tanks (T1 & T2) at the Facility is no more than 9 meters.

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The radius of the smaller Tanks (T3 & T4 & T3 & T6 & T7 & T8) at the Facility is no more than 5meters.

COMPUTING THE TRUE STORAGE CAPACITY AT THE TAYIUAN FACILITY

Please, note that we have used the UPPER RANGE of our estimates. The true Storage Capacity of the 8 tanks at the Taiyuan Facility is more likely to be at around 15000 Metric Tons.

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Measuring the Radius of the tanks at the Gujiao Facility

The radius of the smaller Tanks (T1 & T2) at the Gujiao Facility is no more than 4 meters.

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The radius of the Tanks T3 & T4 at the Gujiao Facility is no more than 5.50 meters.

The radius of the Tanks T5 at the Gujiao Facility is no more than 8 meters.

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The radius of the Tanks T8 at the Gujiao Facility is no more than 6.50 meters.

COMPUTING THE TRUE STORAGE CAPACITY AT THE GUJIAO FACILITY

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The radius of the Tanks T6 & T7 at the Gujiao Facility is no more than 5.50 meters.

Please, note that we have used the UPPER RANGE of our estimates. The true Storage Capacity of the 8 tanks at the Gujiao Facility is more likely to be at around 13000 Cubic Meters.

Our Estimates tell us that the combined Storage Capacity of the tanks at the two Facilities (Gujiao Facility and Taiyuan Facility) is no more than 32000 Cubic Meters (Conservative Estimate 28000 Cubic Meters).

THE REPORTED INVENTOREIS FOR THE FISCAL YEAR 2012 SHOULD THEREFORE NOT BE CONSIDERED ACCURATE.

These are the figures reported by the Company:

To Store that Ammount of Resources, the Company should need more than 62238.32 Cubic Meters Storage Capacity.

Our analysis shows however that the available storage Capacity at the two Facilities is no more than 32000 Cubic Meters.

Disel Gasoline Total

Metric Tons (mt) 26,254.00 22,618.00 48,872.00

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US Gallons 8,100,000.00 8,100,000.00 16,200,000.00

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Cubic Meters 31,254.76 30,983.56 62,238.32 USD Millions 26.40 26.40 52.80 16

DID WE GET IT RIGHT? Pretty much!

This is an aerial view of the Mutsu-Ogawara Oil Storage Co., Ltd.(MOOShereinafter)

Japanese Oil Storing Facility.

The Google-Earth Measured Radius is about 41 Meters (82 Meters Diameter!)

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On the following webpage we can get a description of the Tanks at the Facility: http://www.moos.co.jp/english/Stockpiling/index.html

of Crude Oil

Conversion Source : http://www.bp.com/conversionfactors.jsp Crude Oil Density (average) = 0.79g/ml (= metric tonnes / m3). Source: NC State University (here) This would result in a 100505 m3 volume.

Computing the Volume of the Tank: 125203 m3 This corresponds to an effective Max Utilization rate of the tank volume of about 80%! By taking this findings into consideration, the True Capacity of the two LPH Facilities is more likely to be between 22400 MT and 25600 MT.

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Approximate capacity of 110,000kl, equivalent to 582,000 barrels of crude oil = 79400 Metric Tons

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