IRC Limited (1029) Earnings Call Transcript & Summary

Thank you, everyone. Good afternoon. I would like to welcome all of you to IRC Limited Hong Kong Exchange Stock of 1029 2021 First Quarter Trading Update 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] As a reminder, the conference is being recorded. Announcement and PowerPoint slides we'll be using for this call has been upload, and you can download the documents from our website, www.ircgroup.com.hk. [Foreign Language] It's my pleasure to turn the call over to our CEO, Mr. Makarov. Mr. Makarov, you may begin.

Thank you very much, Kent. It is my pleasure and my turn to welcome everybody. Good morning, ladies and gentlemen. It was another challenging quarter for the company. As you can see, our production was slightly low comparing to the previous period. And this can be explained with the poor performance of our main contractor who is doing a huge amount of -- who should do a huge amount of our open pit operations. But unfortunately, they are doing it in a very -- not in a very good manner. Our sales volumes increased, but that's because -- actually, the -- sorry, our sales volumes increased, and it's actually because of the low sales in previous period. So they -- in this period, they are more or less normal. As you can see in our announcement today, our drying unit worked satisfactorily over the winter. Currently, it stopped because of the beginning of the warm period of the year, and it will be prepared for the next season. We are actively working on the development of our next open pit called Sutara. We are keen to develop it by the end of the 2022 or beginning of 2023. We enjoyed good pricing over the period. As you can see, it was almost 30% higher than it was previously. Russian ruble remains weak, which is not very good for me as a citizen of Russia, but it's very good for the company because our costs are mainly denominated in rubles and it helps us to decrease costs in rubles. Another good thing is that LIBOR was decreased as well, which helps us to decrease financial costs. If you will pay your attention to the Slide #7, you will see that we are not simply watching that our contractor is operating not very good, we are trying to improve operations for these. We have invited another contractor who has -- already operating for 6 weeks, and it's -- we believe that it will help us enormously by the end of the year. We will be able to catch those [ luckily towards ] -- accumulated from the beginning of operations. We're also developing our shipments to the South China, which means that we will be able to bypass those restrictions which we have in -- on the border crossing point with China, which are based on the Chinese policy to -- which is based on the Chinese anti-COVID policy. They have some restraints in allowing trains getting into the China that's why all companies who are exporting to those borders crossing points, they have some troubles up to now, including us. As I mentioned, Sutara will be operation by the beginning of 2023. This will help us to justify the amount of ore until the end of the mine life. I should probably mention Amur Bridge, which is under construction for many years now. But according to the recent information from the authorities and from the company, which is managing the construction, they're going to make first shipments by the end of the summer. And they're actually discussing this information with us. They want us to be the first company who will deliver product to China. COVID, the most worrying thing over -- through the whole world. I should have believed that within the last couple of weeks, we have no new cases of COVID. We have start the vaccination program with Russian vaccines. Up to now, we haven't have done a lot of them, but we are testing our employees for the antibodies, and we are monitoring the increasing of the -- observing the increasing of the level, the amount of people who have antibodies in their blood. I think that's all talking about the highlights. I will be happy to answer questions. Hope there will be some of them. But now I would like to turn to my colleague, Johnny Yuen, to tell you about the financial part of our highlights. Johnny, please.

Thank you, Yury. So if you can turn to Slide 9 of our presentation, it shows our current cash balance as well as loan balances. We closed the quarter with a very healthy cash balance of USD 42 million. That is a significant increase from the last quarter when we closed the year 2020 with $20 million cash. I should highlight the fact that this is arrived at after we paid $8.5 million to Gazprombank as principal and interest repayment as well as paying $5 million to Petropavlovsk as guarantee fee. The total operating debt for the group, which is essentially the amount of the loan due to Gazprombank, is around $200 million at the end of the quarter. So I'm pleased to report that we are slowly accumulating cash on the back of very good iron ore price as well as stable production volume. Slide 10 to 13, a summarize of the key operating services of the market. So I can quickly go through these slides, too. Slide 10 shows a great, healthy and lovely chart of the increase in iron ore price. I'm sure all of you know that we are enjoying a very healthy and strong iron ore price environment. So this is definitely helpful to our P&L. Slide 11 is also encouraging because last year, in 2020 in March, when we saw a sudden depreciation of rubles to 80 something to the dollar, and it has been appreciated slightly to somewhere around the 70s, which is still a very, very weak level, and we are pleased to see that the level remains weak. And obviously, our cost is mainly denominated in rubles while our revenue is in U.S. dollars. So in U.S. dollar term, we are having a less -- a lower level of expense because our expenses are mostly paid in rubles. Slide 12 is again another nice slide. I think I'm sure you know, you must have seen the news saying that China is now trying to control the pollution, and that's why they are trying to shut down a few steel plants. Why are they trying to do that? Steel plants would prefer a higher content of iron ore because with a premium iron ore, they can control the amount of emission, i.e., lower pollution level. And so with that, we are seeing a widening, widening, of the price premium for 65% iron ore over 62%. And we produce and sell 65% iron ore so that the bigger the price premium, the better that we are enjoying. And Slide 13 shows the decreasing LIBOR rate. And obviously, as I mentioned earlier, we are still bearing a loan of $200 million, which is not a small sum, but it's very helpful because the LIBOR rate is very low, so that helps our interest costs. So all these market parameters are working in our favor, and I'm very happy to report this. Okay. Yury, I'll hand it back to you for the competitive advantages, and then we can go to the Q&A.

Thanks, Johnny. For those who first time joining us on our quarter update, I can briefly mention that we are located on the far east of Russia, not far from the border with China, which is represented by the river called Amur or Heilongjiang in Chinese. I hope I pronounced it correctly. We are well excited on the existing plans with them on Amur road, let's say, from the few kilometers from our deposit to the -- this railroad line. And from other side of the deposit, we have a federal outroad, which is connecting us to the main cities of the far east and to the nearest international airport called Khabarovsk. And as I mentioned previously in my part of presentation, this -- the distance of the delivery to China will be even shorter when newly built railroad bridge will be finished. We hope that we will have some savings in our transportation to border crossing point and this will help us to have more steady product flow to our customers. I think this is it, Johnny. We probably should turn to the Q&A session.

[Operator Instructions] Our first question comes from [ Dominic Paminton ].

Yes. Can you hear me? Am I coming through all right?

Yes. All good.

Yes. I've got a couple of questions. One is, given the sort of healthy cash position you have, and it looks like that will continue for a while, and the high interest that you're paying on your debt, notwithstanding the lower LIBOR rates, would it not make more sense to speed up the repayment process -- or sorry, the repayment schedule of your debt? And my second question is -- and I apologize, I missed the first few minutes of the presentation. But can you remind us how much of your production is hedged during the current year? And if you can give us any details on price, that would be helpful.

Yury, let me take that. Yes, you're right. We are gradually building up our cash. And actually, this is really the first quarter where we are seeing a more healthy level of cash. And definitely, we will look at trying to repay the debt or early repay the debt as much as possible. But having taken into account the fact that we have to maintain a certain level of working capital as well as catering for the need for CapEx, in particular, the development of Sutara, so -- but point taken. I think that's a very good point. I mean once we are getting more cash, I mean definitely, we should use it more efficiently. For the second question, for the rest of 2021, basically, we have hedged around 40% of our production. We used [ 0 cost ] quarter mostly with the floor at $100 per tonne and ceiling at $175 per tonne based on 62% iron ore index price. We believe that, that is a very prudent way to manage our portfolio, knowing that we are a single project, single product company. So all is taking a prudent view in looking after the shareholders' benefit. So I hope I answered your questions.

Yes. Just on the debt then, are you able to -- are there any restrictions in terms of the -- of increasing the debt repayments? Or is that your at discretion, if you want to increase repayments?

Oh, yes, we can early repay the loan.

Our next question come from [ Alexis Lin ] from Dubai.

And also good results. I have like a few questions. The first one is related to the production and sales. So in the fourth quarter, you -- your production numbers were much higher than sales but, at the same time, sales in the fourth quarter were like not fully reflecting this like inventory buildup in the fourth quarter. So do you expect this inventory buildup to be reduced going forward in this year? That's my first question. And maybe the second one is related to potential expansion of the iron ore production. So in the past, the company was expecting a potential ramp-up up to like 4 million tonnes of iron ore production. Do you feel the company is comfortable to proceed with this expansion right now? And the third question is related to the guarantee payment to the Petropavlovsk. Actually, last year, you did these payments in the fourth quarter, but this year, you did it in the first quarter. Has something changed in the guarantee payment mechanism? Yes. That's it from my side.

Thank you, [ Alexis ]. Answering your questions about stock building up, we are not going to do it. As you can see, our sales and shipments were higher this period and our production was lower. That's why, for sure, we have utilized those amount of product which we have accumulated in December, if we utilize it to continue shipments when our -- when we were not able to produce. That's the answer to your first question. The guarantee, it's the third question. Guarantee, no, there are no any changes in this quarter. And your second question, sorry, I forget. Can you remind please what was it about?

It is about expansion plan. So do you consider to increase the production capacity like 2, 4 million tonnes like or more?

I'm not sure that we are allowed to disclose all those options, which we have studied. But we are permanently working on the improving of the performance of the mine. And whenever we will decide to increase or whenever we'll be able to do it, we will definitely announce it to our shareholders and to the market.

Perhaps I can add a little bit on -- to answer the question two and three. For question two, yes, indeed. I mean we did some internal review, and we believe that there's room to improve the capacity of K&S. But obviously, if we want to improve capacity, we need to do some CapEx on that. But I guess the limiting factor here is the fact that we do need Sutara to be up and running because, obviously, we do need adequate supply of raw material before we can increase the production capacity. And so the answer is yes or no. Yes, it's the fact that we did look at it, and we believe that there's room for improvement. But the no is that not in the foreseeable future because now our focus is on: a, Bringing the plant up and running to full capacity; and b, to bring Sutara into -- comes into play. So I think that is my -- we can add a little bit on question two. And for question three about guarantee fee, yes, very good spot. I think, yes, we paid $5 million in the last quarter and paid another $5 million this quarter. The idea is that the guarantee fee is actually is due and payable at the end of last year, the end of 2020. But we have an agreement with Petropavlovsk saying that, right, we will pay you as much as we can without hampering our working capital requirements. And so that's why we only paid $5 million at the end of last year. But in the first quarter, obviously, we are building up more cash. We are now slightly more comfortable with our cash balance. And so we are gradually having the ability to repay the debt due to POG, and so that's why we are seeing some payment in guarantee fees. It's basically some settlement, which is -- which we owe them in the past years. So we are now honoring our obligation in settling the debt.

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

Yes. Thank you. [Foreign Language] Thank you very much for joining us today. So we appreciate your time. If anyone has any questions in the future, please feel free to contact us any time. Contact details, you can refer to our corporate website, www.ircgroup.com.hk. Thank you and have a great day.

Thank you for your participation.

Thank you. Bye.