IRC Limited (1029) Earnings Call Transcript & Summary

Good afternoon, good morning, ladies and gentlemen. Welcome to the conference call. Kent, please begin call, and I'll be standing by. Thank you.

Thank you. Good afternoon, everyone. I would like to welcome all of you to IRC Limited 2020 Interim Results Conference Call. With us today, we have our CEO, Mr. Yury Makarov; and our Interim CFO and Company Secretary, Mr. Johnny Yuen. [Operator Instructions] A brief Q&A session, which you can have in English, Mandarin or even Japanese, will follow the formal presentation. As a reminder, the conference is being recorded. And announcement and PowerPoint can be download from our website, www.ircgroup.com.hk. [Foreign Language] It's now my pleasure to turn the call over to our CEO, Mr. Makarov. Mr. Makarov, you may begin.

Many thanks, Kent, and I'm very glad to welcome you, ladies and gentlemen. It was quite a successful 6 months in the history of the company. We have increasing of our revenues by 19%. Our cash cost, a bit lower than it was last year at the same period. EBITDA more than doubled, and our first-ever 6 months where we show profit shows that this period, our team on site and in Hong Kong was operating quite effectively and successfully. My colleague, Johnny, will later give you information about the -- about more details on our financial figures, but what we definitely should admit is that our sales and shipments increased. Our capacity reached 89%, and we have operating on 90% in July and the beginning of August. Unfortunately, we were affected by the heavy rains in August. This includes a period of emergency situation in the -- officially declared emergency situation because of the heavy rains in the area where we are operating in the Jewish Autonomy. But currently, we expect that by the end of the month, when the last typhoon from the Pacific Ocean will pass over, we will be able to establish normal operations. The last but not the least fact which should be disclosed is that we can see that the influence of the worldwide epidemic of COVID is not yet affect us significantly, which allows us to operate on the full scale without any interruptions. Although we are paying quite a lot of attention to making analysis of people, and I'm personally doing it every week and my colleagues are doing the same. I would like Johnny to continue. And later on, give me a couple of minutes to attract attention to our possible key facts, which should be addressed to our shareholders. So please, Johnny, go on with our financial figures.

Thank you, Yury. If I might ask you to turn now to Page 7 of our presentation slides, which shows the key operating data of the group for the first half of the year. As you can see, we are showing a very healthy growth in production and sales. Production increased by 14%, while sales increased by 11%. We have produced and sold basically 1.4 million tonnes of iron ore. So whatever we produce, we -- in fact, we have sold it. And so we operate at operating capacity of like 89% during the first half of the year. Achieved selling price, we have a 7% increase in the achieved selling price on a dry metric tonne basis. Now I think that is mainly attributable to a reduced hedging losses. We had made more hedging losses last year, while this year, we haven't entered into new hedges, and so we have a small hedging losses that contributed to a higher achieved selling price. And then our cash cost, we have controlled our cost, and it has gone down by 4.7% to $48.8 per tonne. That is attributable to a depreciation of ruble as well as our continuous cost-control measures. So in a nutshell, with increased production, a higher achieved selling price and lower cash costs, we are sure to have a very healthy growth in the group's EBITDA. If you look at the bottom part of the slide, the group EBITDA has increased by more than 100%. Now it's $33.2 million. So this is a very healthy growth in our EBITDA, and that translates to our underlying losses, which excludes nonoperating or nonrecurring items and FX. We are seeing a $5.7 million profit for the first half versus the $8.2 million loss last year. So we are making a significant turnaround in the first half of this year. If you look at page -- Slide 8 of our presentation, which shows a more detailed P&L, I'll quickly walk through the line items. First line is obviously our revenue with a higher sales volume. Revenue has increased by about 10%. And again, I mean, we have reduced our hedging losses, so we recorded $3.7 million hedging losses versus last year of $10.7 million. Operating cost, despite a 9.9% increase in revenue, cost only increased by 8.2%. So proportionately, we are showing a small increase in costs. And if you keep on going down the lines, we are showing an EBITDA of $32.9 million. And then our depreciation is basically in line with last year; finance costs, in line with last year. And then our underlying loss -- underlying gain is $5.7 million versus last year's $8.2 million. Then we move down to 2 more significant items. The first point is the exchange gain. Now we'll put it under nonoperating or nonrecurring items because this is basically what the market exchange rate is, and that affects our P&L. As you can all recall, in March this year, there's a quite significant decreases in rubles. And the rubles remained weak throughout -- from March to the end of the period. And so with that, with the weak ruble, we are seeing an FX gain of $5.2 million. Unfortunately, we have another nonoperating item, an operating provision of $5 million because of the need to provide for expenses, which is related to deferred contract payments. We have to make an accrual of $5 million. We are having legal proceedings against the counterparties, and we believe that we don't need to pay this $5 million. But to complete the accounting requirements and for prudence, we are making this provision. So our bottom line at the end of the day is $5.9 million for the first half of the year. As I said, if we don't have to take into account the $5 million provision, which is noncash, and simply accrue, our profit would have been close to $11 million for the first half of the year. And then if you turn it to Slide 9, which shows our balance sheet. I think we have a very healthy balance sheet, and we are gradually reducing our loan balance due to Gazprombank. So the current bank borrowings is around $212 million. Slide 10 is the cash flow statement. The top line shows that we are having an increase in the cash generated from operations. We are recording a $20 million cash inflow versus last year's $13 million. And I think the most significant thing I would like to highlight is the fact that our closing cash as of the period end was around $5 million. Now that sounds a bit low because of same as any other operations, we are -- our operations are subject to timing of cash flows and movement in working capitals. It happens to be that at the end of the reporting period, we were a bit low in cash because there are some receivables, which were still to be received after period end. So I'm happy to report that as of middle of August, the cash balance has gone back to $17 million now, basically. So if you look at a snapshot as of period end, cash balance was low, but I can assure you that this is just the normal working capital movements. Slide 11 summarizes the differences between Gazprombank and ICBC facility. I think we are seeing the positive impact of refinancing, i.e., because this Gazprombank facility should be ramping up progress of K&S, we are showing a positive final set of financial statements as reported previously. And so that concludes my part in terms of the financials of -- in the first half of the year. I'm happy to take questions in the Q&A sessions. But for the time being, I would like to hand the call back to Yury and he will talk about the competitive advantages that IRC has in Slide 12 and 13. So Yury, can I hand the call back to you?

Let me check out the line for you. One moment.

Yes, please.

Sorry, I forget to turn on my microphone, sorry. Johnny, thank you so much for your update on our financial figures. I just want to summarize some maybe very important fact to understand the situation. First of all, the price for the iron ore, probably now on the highest levels comparing to what it has been last year or a year before last. So it's a very favorable situation for all iron companies. But for those who are not far from China and from Southeast Asia, it's very -- it's the most attractive. What is also very good for us in current situation is that we are on a very high production and shipment rates. We were operating in July on 90% of our capacity, and we are absolutely capable to keep it, but we were affected by the severe rain showers. Russian ruble is also very favorable for us being a bit depreciated, which helps us to control costs. Another very important financial part of our cost is the interest rate for the bank, which we are paying, returning our loan. So lowering LIBOR helps us to decrease our financial costs as well. And the most important and most interesting is the fact that local authorities confirms that by the end of the next year, they will be able to operate and to start operations over the newly built Amur Bridge, which is completely ready on the Chinese side, a bit behind schedule on the Russian, but still, sooner or later, it will be completed. And this will help us to decrease our transportation costs a bit more. I think that that's all what is important for understanding of the environment where we are operating now. And I think, Kent, that we can now switch to the Q&A session.

Yes. Operator, thank you. Please go to Q&A.

[Operator Instructions] Our first question comes from Franklin Templeton. Mr. [ Lynn ]?

Can you please elaborate on the pricing of the ore? Because you are still continuing selling with a big discount to 65% fine, and even you're selling with a discount to 62% fine. So can you explain the reason? Because you -- I remember in the past, you were saying that you're selling actually 65% fine product, but you need to provide discount as you're a newcomer, but you continue selling with a big discount for like 3 years in a row. So what is the reason for this? And given the fact that the benchmark is now $137 per tonne, so at what price are you selling at the moment?

Johnny, are we allowed to disclose our price level?

Yury, I don't think we need to disclose the detailed pricing formula. But I guess, the question is about the difference between our achieved selling price and the benchmark price. So I think it's just a matter of a general understanding of why we are offering the discount to the customers.

Very interesting question talking about the discount itself, not about the pricing level. We have a long relationship with this client. And we would be happy to get more money from them, but it's quite hard on the very tight market of China, considering that we are competing with the iron ore, which is delivered to China from Australia and Brazil by the sea freight. We probably need to understand that one of the reasons why I paid that much attention to the new river bridge in the -- it was the Amur River one which is going to be finalized next year according to the local authorities, that after this bridge will be in operations, our transportation costs will be lower, and this will be reflected in the increasing of our revenues. We don't know exactly how much it would be cheaper because tariff is not defined yet, but we felt -- we believe that it will help us to save transportation money as well. I think that's it.

Can I also add that while at this moment, we are looking at iron ore price of somewhere around $130 per tonne for the 60% -- 65% iron ore, but in actual fact, during the first half of the year, iron ore price, on average, 65% was only around $105. So I mean, when you look at my presentation, which showed the achieved selling price versus the first half of the year, which is actually having a much lower benchmark price. Obviously, July and August have been very good months. I mean now the iron ore price is -- the benchmark price is around $131. So I just want to clarify that the first half of the year, the benchmark price wasn't as high as you see today.

Yes. But that is actually exactly the point because it feels that you are selling at 25% discount to market price. And I have never seen such a difference on any market. So it seems to be like a related-party transaction where you're basically stripping money from the company. So that's why my key question. And as Johnny said, are you saying that the current price level is $137, and you're still selling at $80 per tonne? So even like 50% discount to the market price?

It probably should be noted that we are discussing -- you're discussing today price and comparing it to the 6-month price, which we get on the rising market. So it's quite unfair to compare those which we have averaged within last 6 months to the current level. It will not give you a proper picture. In -- by the end of the year, it will be more clear that we definitely doesn't have such a big discount for our -- in our price formula.

And I can also add that, basically, the discount that we are seeing in the first half is somewhere around $19 because the average price was $105, and our achieved selling price before hedging is $85. So it's basically about $19, $20. So that is consistent with our previous discounts in the previous reporting periods. And also I can also reassure you that the customers that we are selling to are not related to us in any way. They are third parties. And so there's no concern of selling to a related party or try to getting anything out of it.

Okay. But in any case, if you look in the -- is the discount in absolute term or in percentage terms?

There's some detailed pricing formula, which I'm afraid we are not in a position to disclose because that is obviously a bit commercial. So if you allow me, I mean, we will try to avoid this question, but I can assure you that the discount we are offering is basically consistent with what we have been offered previously. As we see an increase in the price, let's say, in July and August, we will see an increase in our achieved selling price, but that will be shown in the second half of the year.

Right. And like -- yes, sorry, sorry, sorry.

No worries. I can add that when price will start to fall down, we will be definitely in the different -- in the absolutely opposite situation when our price will be inherited from the higher levels. It will be higher than the price at the moment. If you view at our historical information, you definitely will find this confirmation for that fact.

And just to follow up, as soon as the -- Amur Bridge is not constructed yet, so -- but do you have any chance to sell to other clients?

Of course.

So why are you not utilizing this opportunity?

We are utilizing this opportunity.

No. But I mean, I'm saying the discount still prevails, right? And if you're looking on your sales, so why cannot you find buyers which can buy it closer to the marketplace?

You're probably a new shareholder or new analyst, and you don't know that we have shipped our product to a Russian company called EVRAZ in the May of this year. That's probably answer -- answering your question on why we are not selling to somebody else. We have been selling to somebody else.

So -- but EVRAZ is located in Russia, right. So why you cannot sell to China?

We are selling China to a company called Jianlong. We are selling to another company in China as well. I can't remember the name of these companies, but we are shipping to them -- to the companies, which are to whom we are delivering by the sea. They are from the southeast of China, not from the northeast.

[Operator Instructions] There seems to be no further question at this point in time. Would you like to wrap up the call, sir?

Yes. Thank you, operator. And it's now my pleasure to turn the call -- [Foreign Language] So if there is no more question, we are now ending the meeting here. And thank you, everyone, for joining the call today. We appreciate your time. If anyone has any questions, please feel free to contact us at any time. Contact details, I refer to our corporate website, www.ircgroup.com.hk. With that, thank you, and have a great day. Bye-bye.

Thank you for your participation. This concludes your conference. Thank you very much.

Bye.