IRC Limited (1029) Earnings Call Transcript & Summary

[Foreign Language]

Hi. Good afternoon, everyone. I would like to welcome all of you to IRC Limited Stock Call 1029 2020 Fourth Quarter Trading Update Conference Call. With us today are our CEO, Mr. Yury Makarov; and also our interim CFO and Company Secretary, Mr. Johnny Yuen. [Operator Instructions] As a reminder, this conference is being recorded. Announcement and PowerPoint, we'll be using for this call, have been uploaded, and you can download the documents from our website, www.ircgroup.com.hk. [Foreign Language] Okay. It's now my pleasure to turn the call over to our CEO, Mr. Makarov. Mr. Makarov, you may start.

Thank you, Kent, and a very warm welcome to everybody. Who is participating on this call. And I would -- I'm very pleased to announce that in this quarter, our production is increased. We are operating now at 87% of our full capacity, which is 3% higher than it was in previous quarter. Our year capacity is 85%, which is also, I think, quite a good figure. And in this quarter, we have some problems with shipments through the Russian Chinese border, but we successfully delivered out of our shipments to the seaborne trade. We have done it previously, but it was more kind of investigation, whether it's possible or not. But thanks to these preparation measures. In this quarter, we managed to do it in a bigger quantities. And another good bit of information is that our iron ore prices were quite stable and quite high in this quarter, which helps us to earn a bit more money than it was in previous quarter and previous year. Russian ruble also helps with it, 16% depreciation and depreciation is currently lower than it was in previous quarter. You can see financial figures, which is $20 million at the year-end. And I'm pretty sure that joining my colleague, our financial director will later give you more information about it. So what else should be noted is that our mining contractor, which we blamed previously started to operate much better. They increase the production this quarter, and we hope that they will increase it further. But just to be on the safe side of the operations, we are discussing implementation of the -- of another contractor as well as doing part of our mining with our own equipment and our own people. I think that another interesting fact is our drying unit, which is very quite good. We were experiencing some problems last year and year before the last, but our people managed to fix some problems, which we inherit from our subcontractor who build the processing plant. So drying unit is operating quite good. And it helps us to satisfy our clients. Part of them are very sensitive for the humidity in the -- in our product. I think that, this generally, all what I was going to mention in this part of my speech, I will be very happy to answer your questions. And I would like to turn to Johnny. Johnny, can you please give us figures on -- more figures on finance.

Sure, Yury. Thanks a lot. As Yury was referring to the presentation slide, which we have uploaded to our website earlier today. Yury was referring to Page 5 and 6, 7 of the slide. So if I may draw your attention to Slide 9 of the presentation slide, showing the cash deposit balance and total outstanding debt of IRC. As you can see in the slide, we closed the year with a very healthy cash balance of USD 20 million. Now if you look at our last quarter, our closing cash funds was around $14 million. So we managed to add $6 million onto this balance. But I would also like to draw your attention to the fact that this [ years figures ] after we have paid $5 billion of guarantee fee to POG, our guarantor, as well as $8.6 million loan -- principal repayment as well as interest payment to Gazprombank. So we are building up the cash we did for the year. And slide 10 shows that -- upper end approaching of -- chart of the iron price movement. Basically, as you all know, I mean, we are afraid of full year in terms iron ore markets, the iron ore price has blown up by almost 80% throughout the year. So we are taking good benefit of this market sentiment. Slide 11 shows rubles. As you know, our costs are mostly denominated in rubles. So the weaker the currency is, the better our P&L will be. And we are very happy to report that the currency has depreciated by about 18% per year. And that is, again, very helpful. Slide 12 is another interesting slide, which talked about the premium between 62% and 65%. As you all know, we produced 65% iron ore, which is our premium product [indiscernible] benchmark over 62%. And as you can see in the top part of the slide, we can see that the premium for this 65% iron ore is actually increasing. We closed the year with a premium of somewhere around 12 -- $14, but now we are seeing a premium of $20. And at the end of this year, we are expecting that the premium will be increased to $22. Again, the higher the premium, the better we will be. And at the lower part of slide is another interesting part. Well, 3 -- 4 -- I mean, it's very simple to say that iron ore is the best performer in the commodity market. It outperformed the brent, lead, copper and all these commodities. So we are very fortunate to be operating in this iron ore market. Slide 13 shows another benefit that we are enjoying. The LIBOR rate is going down. And obviously, as you all know, we have a loan, due to cash on [ balance sheet ], denominated in U.S. dollar and its interest is determined with reference to LIBOR. LIBOR has gone down quite a lot in 2020. Now it's somewhere around 0.22%. So last year, the average of 2.33%. So we're looking at great -- a reduced reduction in LIBOR rate, and so our finance cost has also decreased. We don't have the actual financial numbers, yet, because it's a trading update, but we are still to announce our annual results at the end of March. By that time, I can share a few more details about P&L, balance sheet and cash flow. That is all I have at the moment, I will pass the call back to Yury to summarize our competitive advantages, which is shown in Slide 15 of the presentation material. Yury, can you go through Slide 15 for us?

Sure, Johnny. And as you probably know, we are situated in a very, very important part of Russia, which is very close to China. Our shipment rates are quite low comparing to our competitors from Russian Mainland and to the main suppliers of iron ore to China, Australia and Brazil, which is more important it is not affected by the hurricane seasons, typhoon seasons. Although we have sometimes some shipments restrictions very are much lower and less long than those [indiscernible] because of them -- because of the typhoon. Our -- we're also enjoying good price of iron ore, which is increased because of the good shape of Chinese economy. Russian ruble helps, as I mentioned previously as well. And it is depreciating so it helps us to decrease our ruble costs. As Johnny mentioned, LIBOR is increasing as well, which is decreasing our financial spending. And finishing with what I have started. Iron ore, it's a logistics demanding business, and we should not forget that not later, hopefully, sooner than later, we will be able to decrease our transportation costs because of the finalization of the construction of the Russian bridge -- of the Amur River Bridge between Russia and China. And this will also help us to deliver iron concentrated with some savings. Seeing this journey, I think we can shift to the Q&A, right?

Yes, please.

Hi. Operator, please start Q&A.

[Operator Instructions] So we have the first question from [ Louis, Danish Capita ]?

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

Okay. So next question is coming from private investor, [ Mr. Sharma ].

I wanted to know more about the iron ore price. What is your will on the iron ore price?

Right. Yury, let me take this question, if you don't mind. Right.

Sure, Johnny.

Yes. Well, again, I think we are not in a position to make any forecast because the market is so dynamic. Well, at the beginning of the year, obviously, with COVID and all the global trade tensions, the market sentiment was generally quite pessimistic. But as you all know, we have seen this pretty nice price value in the 2020.

Why?

Obviously, as you know this is caused by sub-supply disruptions, caused by COVID, in particular, is a prime [indiscernible]. As far as very strong demand from China, after they come up with COVID situation and then the legal process in the recovery of the business. So I think it's a classic example of short supply and strong demand. And it's just pretty difficult to make any concrete forecast as to what the direction the market will be. Obviously, as you know, we have seen some correction of iron ore price yesterday or 2 days ago. But I think we have seen sort of healthy increase in the past year. So that this cuts more adjustments also healthy to the iron ore price on the longer term. So I hope this answers your question.

Well, the price actually is very strong at the moment. And I just want to know, are you looking into the idea of hedging?

Yes. Again, a very good question. Well, I think, indeed, we are planning to supply for a strong iron ore price. And we're also encouraged by the outlook in 2021. Well, given that the fourth quarter suggest good price level for the remainder of 2021. But obviously, as usual, the fourth quarter is displacing a [ passage ], but this has always been the case. But nevertheless, the forecast iron ore price for 2021 remains very strong. So we are very happy about this. Well, obviously, it would be nice to lock in a [ big ] price at such a price level. But unfortunately, in practice, well, it's not that simple. Let's say, we use zero cost collar to do the hedging. The priced protection available in the market is not that high. And so well -- if -- so we are not -- it's very difficult to get any meaningful hedges. Obviously, the nature of zero cost collar means that you have to give us certain upside potential. So that will -- we just can't enter into any hedging. And without considering for 15 bps [indiscernible] potential. And the other thing is, the term of this zero cost collar normally is not very long. You can only hedge for, let's say, less than 12 months. So it's a lot easy to do some very effective hedging. Well, obviously, we can also boycott, but that will require us to pay some upfront payments. So we have to be very care full about this as well. So in a nutshell, I think we are indeed looking into iron ore hedging, but we will only do so if we consider that hedging terms are favorable IRC. I think that's the position that we are having. I hope that answers your question.

So we are going to -- the next question is from [ VC Investment, Mr. Henry Petros ].

I actually have 2 questions. One is regarding your drying unit. Could you be more specific about these mitigating measures be taken of these unit? Like what exactly are risk measures? And what are the costs of those measures? And you also mentioned that you resolve some of the issues you've been facing recently. It's like you finally resolved everything or we still have some problems to this?

Thank you for your question. It's Yury Makarov. I have -- I will try to answer it. Obviously, I can't give you all the details of the fixing of the problem for a drying unit, because it was -- I might head in the last 4 years. What we have actually done, is not dive too deep into the technical detail, we have removed as much bottlenecks as it has. We are -- my infrastructure conductor leaves us. So for example, just to give you some colors of the picture. Our drying growth were not sealed, and big part of the heat was just spreading in the atmosphere, which is quite good in winter in Russian forest, but it's not very good for the drying of the concentrate. And we have spent quite a lot of time to identify these areas of the losing of the temperature and implementing measures of -- which can be done to seal the heating machine. And the huge amount of this small and big things, which we have fixed within the last couple of years. As you probably know, we are now in the process of leg of dispute with our -- I will call it softly dispute, with our contractor. And hopefully, we will manage to get some compensation for these problems. And your second question was have we fixed it at all, right?

Yes.

So yes, currently drying unit is operation quite good -- operating quite good. We are not drying everything and so it's not at the 100% capacity. It's -- part of our concentrate we are freezing and delivering to our clients in this form, which is key for them. But in any case, we are not restricted with the drying unit as it was previously. So yes, more or less, it's operating satisfactory for the production plant.

Okay. Okay. So the next question is -- okay. Okay. And also another question is regarding the coronavirus situation at K&S because as far as I know, it's been really just a lot of cases of coronavirus in Russia. So could you give us some kind of outlook, general outlook for K&S? Have any measures be taken to protect the personnel and sustainability of production? How many cases have been registered? And what is the like recent situation?

I think that we have not been affected that bad comparing to some other mines, which were affected sooner than us. Being in the second [indiscernible] of this disease, we managed to prepare ourselves to fight with this disease a bit effectively. We have organized kind of an isolation place for our people. We are measuring temperature. We are measuring oxygen of employees quite frequently. So these have not been affected things good seriously. Almost all cases of our COVID, where as a result, the symptoms or with a very light form of the disease, including myself, I am recovering right now, you can hear me coughing. But I have been more or less in the isolated conditions, but still capable to work. Where -- what had -- have been -- where we have been effective is in our logistics area because of the COVID, our Chinese partners on the border, we're a bit restricted with reloading facilities because many people there have been ill. But as you have seen, this situation is improving, and we are currently shipping quite a lot to China. So thanks, God, in this area, it's also not that better that it could be or in some countries. And what I would like to add is that in Russia, dynamics of the new cases is quite positive within last 10 days [indiscernible] who are -- the amount of new cases is decreasing every day, which is very positive for me and for -- actually for everybody. 30 days ago, we have around 29 (sic) [ 29,000 ] new cases every 24 hours. And currently, it's around 19,000. So I think that situation is improving quite fast. That's it about COVID on our side. Hopefully, I answered your question.

So we're going to next question from [ Somerset Investment, Mr. Andy Chan ].

[Foreign Language]

[Foreign Language]

Yury, this question is about mining contractors. The question is saying that, well, it seems that our production is being affected by this mining contractors, so what's going on with these contractors? And how are we going to resolve the issues and when they could be resolved? That's the question from his gentlemen.

Right. Can I answer it in English and you translate it.

Okay.

As I mentioned in my part of presentation, situation is improving within last quarter. It's still not satisfying enough. That's why we are trying to implement another contractor. And we are also seriously thinking about possibility to do part of the mining operations by ourselves. So mine conclusion, yes, is that contractor is improving, but we need more. I would say in this way.

Okay. Understood.

Please translate this, Johnny.

[Foreign Language]

Due to the time limitation, 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, can refer to our corporate website, www.ircgroup.com.hk. With that, thank you, and have a great day. Bye-bye.

Bye.

Bye-bye. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]