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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,

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

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 50’405 Metric Tons, corresponding to a utilization rate of ”approximately 40%

of its total capacity of 120’000 Metric Tons”1.

For our analysis we neglect Fuel oil and Solvents Inventories. Therefore the Total Inventories relevant

for the analysis amount to 48’872 Metric Tons.

1 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 120’000 Metric Tons).

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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) US Gallons Cubic Meters USD Millions

Disel 26,254.00 8,100,000.00 31,254.76 26.40

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) US Gallons Cubic Meters USD Millions

Gasoline 22,618.00 8,100,000.00 30,983.56 26.40

Computing the Total:

Metric Tons (mt) US Gallons Cubic Meters USD Millions

Disel 26,254.00 8,100,000.00 31,254.76 26.40 Gasoline 22,618.00 8,100,000.00 30,983.56 26.40

Total 48,872.00 16,200,000.00 62,238.32 52.80

This means that at LPH Gujiao and Tayiuan Facilites, the Company needs

to have at least 62’238.32 m3 Storage Capacity.

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

27.05 m

27.05

54.12 m

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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 62’238.32 m3 Storage Capacity

(level of inventories at June 30, 2012), need to be 34.67 m tall.

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 70’000 MT. 70’000 MT correspond to about 70’000 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 50’000 MT. 50’000 MT correspond to about 50’000 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.

If we assume that each step is 30cm high, the 6 smaller tanks at the Taiyuan Facility would be

about 14 meters High!

6 steps

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

about 23 meters High!

1/2

38 Steps UNEMON

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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. UNEMON

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

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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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:

Metric Tons (mt) US Gallons Cubic Meters USD Millions

Disel 26,254.00 8,100,000.00 31,254.76 26.40 Gasoline 22,618.00 8,100,000.00 30,983.56 26.40

Total 48,872.00 16,200,000.00 62,238.32 52.80

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.

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DID WE GET IT RIGHT? Pretty much!

This is an aerial view of the Mutsu-Ogawara Oil Storage Co., Ltd.(“MOOS”hereinafter)

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

Approximate capacity of 110,000kl, equivalent to 582,000 barrels of crude oil = 79’400 Metric Tons

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 100’505 m3 volume.

Computing the Volume of the Tank: 125’203 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 22’400 MT and 25’600 MT.

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