IRC Limited (1029) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to the conference call. Please go ahead. Thank you.

Thank you. Good afternoon, everyone. I would like to welcome all of you to IRC Limited, 1029 on Hong Kong Stock Exchange list company, to talk to our annual results announcement conference call. With us today, we have our CEO, Mr. Yury Makarov; and also our Interim CFO and Company Secretary, Mr. Johnny Yuen. [Operator Instructions] A brief question-and-answer session, which you can ask in English, Mandarin or in Cantonese, will follow the formal presentation. As a reminder, this conference is being recorded. Announcement and PowerPoint is uploaded to our website. So this could be to download from 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 start now.

Thank you so much, Kent. Hello, ladies and gentlemen. I'm very happy to use this opportunity to notify you that after the summarizing of the results of the 2020 year, we have increased our revenues. Our EBITDA is much better. And what makes us to be specifically proud is our first profit, which we have done last year. It's around $24 million. And hopefully, we will continue in this direction -- not hopefully, but most likely. It could have been better. But because of some unpredictable and not-controlled-by-us things, these are -- this is only $24 million, but we will do our best to improve it. Our cash balance has also increased. And I'm pretty sure that Johnny Yuen will give you more details on that in his financial part of our report. But what I can add is that we are improving the production. It's already around 87% after this year. And it also should be mentioned that our construction activities are quite advanced. Our Sutara deposit, which will be in the operations in a couple of years, under the construction, we are building river diversion channel. We are building railroad -- sorry, road activities and electricity lines, which will help us to operate there. It itself will start to operate maybe in 12, 15 months. And generally, that means that things are going smoothly there, which means that we will be able to supply ore from this deposit at the end of the 2022. You can see that our mining -- the amount of cubic meters and tonnes we are mining have increased. That means that those problems, which we have with one of our mining contractors, more or less bypassed, but to improve in the operations even further. We have had another one, which we should be in operations in April, and this also will help enormously to make a stable supply of ore to the processing plant. As you can see from our presentation, drying unit has been very good over the drying season. Now it's going to be stopped within a couple of days. And as usual, we will spend some time over the summer doing some reviews of the equipment. But we should admit that finally, we managed to fix all those problems, which we inherit from our construction contractor from the construction period. From the marketing point of view, over the last year, we enjoyed very stable -- very good pricing of iron ore. But we were not simply getting what the situation gives us. We were also developing some new routes of delivery of our product to our clients. We increased the amount of concentrate we are shipping to clients in China. For example, shipped by the sea, it's not an easy way to deliver and not the cheap way. But still, we believe that this could be a good option on certain stage. And we will continue to explore these options. Another very interesting point is Amur Bridge, which was under construction for quite a long period of time. And the commissioning date was moved a couple of times. But there are number of signs which makes us feel that it will be commissioned at the second half of this year, and it will be in operations early next year. The most -- one of the most important things of operations side of the business is COVID pandemic. We have spent enormous amount of resources to protect our personnel from this disease. We start vaccination this year. And hopefully, this will remove this nightmare further from our sites and from our employees. I think that's it from an operational point of view, and I will be happy to answer any questions in the Q&A part of our report, if I -- if there will be any. And now we'll be glad to turn to Johnny to get information about financial position. Please, Johnny?

Thank you, Yury. We have our presentation slide uploaded onto our website. So let's make use of that while I'll go through the numbers review. If you turn to Slide 9 of our business unit slide, it shows the key operating data for this year 2020 as well as last year as comparatives. First line, production capacity, we have been able to increase our capacity by 10%, so we managed to operate at 97% (sic) [ 87% ] capacity of K&S. We produced 2.7 million tonnes of iron ore, 10% higher than last year. Sales, we increased by now, let's say, only 5%. Now that is because, if you remember, at the end of last year in December, we experienced certain railway congestion issues, in which case, we couldn't ship as much product as possible to our customers. We were -- we needed to stockpile excess production. And that's why we -- the sales in December was lower than usual. But I'm glad to report that we are now gradually reducing the stockpile in the first quarter of this year, and we are gradually selling those stockpile products to our customers. Achieved selling price, the best way to look at it is to look at the dry metric tonne without hedging. Our achieved selling price on that basis is $100 per tonne, which is a 15% increase over last year. Now that is very much comparable to the increase in Platts price in last year. Platts increased -- the average Platts 65% iron ore price has increased by 17%. So we are very much comparable to Platts' increase in price. Cash cost, we managed to reduce it by 4%. So we are now operating with a cash cost of $51 per tonne. So that summarizes the key operating data. Turning to Slide 10, will be our quick snapshot of our P&L. This year, we have increased our revenue by 18% because of the stronger iron ore price, a 10% increase in production and 4% increase in sales volume. So we got USD 236 million as revenue. Hedging loss, we had a $12 million hedging loss. That is more than last year because we have a much smaller scale of hedging in 2020. Site operating expenses, it increased by 3.5%. But I also wish to highlight the fact that this is still comparing for freight per freight to the 4.6% increase in sales volume. So even though the sales volume increased, it's fallen back, we are managing to control our costs to increase by only 3.5%. General admin expenses, a decrease of 14%. We continue to be very stringent on cost measures. And also, obviously, we delayed some of the CapEx, capital expenditure, due to COVID. So all in all, our EBITDA this year is about USD 80 million. Now that is a much, much improved performance when compared with last year when we only achieved USD 33 million in EBITDA. And then moving down the line, we've got depreciation, finance costs and the income tax. Those are usual costs, but the line I want to highlight is this underlying gains or losses. Now that is what we call the line that we should be looking at because that is the line which showed our true performance this year. This is our, let's say, our maiden underlying profit, which is $24 million this year. Last year, we were making a loss of USD 21 million. So moving down the line. Because of the stronger iron ore price as well as increase in production volume, we record a reversal of impairment losses for K&S of USD 76 million. That is a low in cash reversal, but still is a profit that we report in this year. FX gain is $7.6 million because of the depreciation in rubles. While last year, we have an average loss of $6.1 million. We have an other provision of $7 million, which is basically we owed a contractor, a certain contractor sum, but we have a counterclaim against this contractor. So we don't believe that we need to pay for that contractor's fee. But nevertheless, for accounting purpose, we need to book for the late settlement of the contractor's fee, and that amounts to $7 million. So that is a low in cash provision. After taking into account all of this, we are reporting a profit of USD 101 million this year as compared to a $39 million loss of last year. So it's a significant turnaround performance in 2020. So that summarizes the P&L. I'll quickly go through the balance sheet as well. I think the first line you're looking at is obviously the fixed assets, which has increased by around 9.3%. That is essentially the reversal of impairment of K&S that I mentioned earlier. The rest of the lines, I'm sure you understand what they are. And the one I would like to highlight is here at the bottom of the page, which shows the net asset value per share. It's now HKD 0.42. And obviously, you know where our share price is. So I believe that we are undervalued in our share price. So turning to Page 12 is our free cash flow. The top line is very encouraging. We are generating more cash this year because of strong EBITDA. We've got USD 63 million of net cash generated from operations. Going down the line, we repaid bank loans. In accordance with the Gazprombank repayment schedule, so we repaid USD 21 billion this year. $16 billion is paid for interest. Now that is a reduction from last year of $21 million because of, a, a reduction in LIBOR; and b, obviously, as the principal gets smaller, we pay less interest. We paid CapEx, $5 million -- or $6 million, that is mainly for Sutara. We also paid $5 million guarantee to POG, our guarantor for the Gazprombank loan. So all in all, we have increased our cash balance from USD 4.3 million last year to $20.4 million this year. So I hope you can grasp the picture of the fact that we are turning the corner and we are accumulating more cash. Slide 13 is just a normal slide showing you what our liquidity position is. At the end of the year, we have a total debt of $204 million with a cash balance of $20 million. We repaid the Gazprombank loan in accordance with schedule. And as I mentioned, we also repaid $5 million to POG as guarantee fee settlement. So that just kind of summarizes what we achieved in 2020. Page 14, 15, 16 and 17 summarizes the market movements for those key parameters. The number -- Slide 14 shows the first iron ore price for this year. But it's very interesting, if you look at the way the iron ore price increased, obviously, it's an upward trend. But the most important thing is that most of the upward movement is being captured at the end of this year since we saw a strong increase in November and December. And so that's why, while we are having a very strong iron ore price currently, it's not exactly reflected in our 2020 P&L. And then ruble depreciation is Slide 15, which I'm sure you know what the story is. The ruble current exchange rate, 75, which is still very weak, which will be beneficial to us because that lowers our expense level in U.S. dollar terms. Slide 16 is another very interesting slide. I'm sure you guys know about the news about the pollution in China, and so some of the steel plants have to cut down the production. Now that is actually, to a certain extent, beneficial to us because our product is 65% iron ore, which, while the steel plants making -- is making use of our products to produce its steel products, it actually emits less pollution. So that's why when there's a pollution control in PRC, the premium for the fixed price of the iron ore is actually getting bigger because January, the steel plants want to get high-quality products like ours. So again, it's encouraging. Slide 17 just shows you the decrease in LIBOR, which is beneficial to us because we pay net interest because of the lower LIBOR rate. So I guess that summarizes what we achieved in 2020. I will hand the call back to Yury for the competitive advantages and the Q&A session. Yury?

Thank you, Johnny. I think that we actually can turn straight to Q&A. Hopefully, there will be some questions.

[Operator Instructions] [Foreign Language] Our first question comes from [ Maggie Cheng ].

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Okay. [Foreign Language] Yury, this question, I guess, you're in the best position to answer. The question is about the railway logistical issues that we encountered at the quarter 4 last year. As you -- we mentioned in our quarter 4 trading update that we have this traffic congestion issues in December, and then the problem was gradually resolved in Q1. So Ms. Cheng would like to know what the current situation is. Can you give a bit of more color on this?

Usually, we see troubles with rains, wet rains in summer and frozen water in winter. So we have, as you mentioned, Johnny, we have some troubles in December when everything in the Far East where within 12 hours, first of all, wet within -- because of the rain, because of the warm period and then almost immediately, temperature dropped to 20, 15 degrees, and this water was frozen. So all electricity lines were damaged. Many pieces of the equipment of railroad were damaged. That's why it was a nightmare in the railroads of the Russian Far East at the end of the year. That's one -- that's the main reason why we didn't ship that amount of concentrate, which we were going to. We are shipping it gradually now as an additional amount to what we can produce. It's quite a rare situation, but it's nature. Maybe it has some connections with the climate changing, whatever the reason for display -- for these changings are. Anyway, right now, this situation is gone, and we are shipping quite smoothly without any troubles. There are some from time to time, like in any logistics, there are traffic jams because of timber, because of coal, but it's not that size of troubles as it was in December.

Okay. Understood, Yury. [Foreign Language]

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Okay. [Foreign Language] Yury, the bridge. So Ms. Cheng would like to know what's going on with the bridge. I mean we have seen several delays. So do you have any update? And to stress the question, any update? And second question is, once the bridge is in operation, will it ease the transport congestion issue that we have just mentioned?

Thank you. It was a very good question. Answering question number one, there are official information that it should be in operations by the end of this year. And there are unofficial signs, as I mentioned in my part of the presentation, is that there will be some technical shipments before that may be at the end of summer because Russian railroad starts to discuss with us technology of the shipments. Bridge owner approaching us, asking us whether we will be able to do some deliveries by somehow this summer. So it seems that not only official declaring that the construction of the bridge is close, but unofficially, it's also confirmed. And answering to your second question, whether it will help, to a certain extent, yes, it will create new border crossing point on the Chinese-Russian border. And we believe that at least at the first period of time, we will be only one company who is doing border crossing there. Don't know how long will this situation last, but for sure, it will help for -- at the beginning. And we should not forget that our client, main client for -- in China, a company called Jianlong is situated only 150 kilometers from this bridge inside China. It's very close and it's really convenient for them.

Okay, Yury, understood. [Foreign Language]

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And our next question comes from Mr. [ Petro ] from [ DC Capital ].

I have noticed that mining contract issues have already existed for a long time. And it seems that has kind of very negative impact on production. Is it still a problem, like a bottleneck for company production? And are there any plans to resolve it?

Johnny, I'm afraid I have not heard the beginning of the phrase. Is it about the mining contractor?

Yes, yes.

Right, right.

Thank you. Yes, it was a bottleneck over the year. Our contractor doesn't perform well. As I mentioned in my speech over the first part of the presentation, we have had another contractor. We're also looking for the possibility to use our -- or to buy our own equipment and to use it to have better control on what is going on in the open pit. So I believe that the situation will be improved. And somehow, midsummer, we will catch what they have not done over the last year.

[Operator Instructions] And our next question comes from [ Bella Hui ].

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[Foreign Language] Yury, this question is about iron ore price. Why is that -- while the current iron ore price is so high, why is that our achieved selling price is not catching up with the current high iron ore price? So let me answer that in Chinese first. [Foreign Language]

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Our next question comes from [ Liz Lee ] from [ Rising Light ].

I would like to ask about the pit development called Sutara. Can you please explain what Sutara is, the development plan, when it will come into operation and if you need to raise funds for development?

We are not building the pit itself yet. We are building the infrastructure for the pit, like roads, electricity lines, river diversion channel to remove water from the future pit. And we will start the construction of the pit itself maybe within 12 months -- somehow within 12 months, not maybe. And about the funds, I will ask Johnny. Can you please clarify this?

Sure. Actually, for the product development, we do not need to do any external financing. We envisage that we will be able to fund the CapEx by our own in generated cash flow. So we are not expecting to do any fundraising events for this to product development.

Okay. My second question relates to COVID-19. So I would like to know the current situation of the K&S mine, and what has been the impact of COVID-19? And has the staff been vaccinated? What is the plan?

Things got -- we are recovering. We have done -- we have started the vaccination of our employees. We are using, obviously, Russian vaccines, which are quite available. So this process is going on.

Our next question comes from [ Olav Kwan ] from [ Solid Financial ].

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Okay. [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, you can refer to our corporate website, www.ircgroup.com.hk. With that, thank you, and have a great day. Thank you. Bye-bye.

Thank you. Bye.

Goodbye.