IRC Limited (1029) Earnings Call Transcript & Summary

Thank you. Good afternoon, everyone. I would like to welcome all of you to IRC Limited, to our second quarter trading update conference call. With us today, again, is 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 slides we'll be using in this call have been uploaded, and you can download the documents from our website, www.ircgroup.com.hlc [Foreign Language] It's now my pleasure to turn the call over to Mr. Makarov. Mr. Makarov, please go ahead.

Thank you, Kent, and good morning, ladies and gentlemen. We would like to and give you an update about our operations within last quarter. We are very pleased that our production is increased, not that much, but still we are now operating at 85% within this quarter. Our sales were a bit lower because of some restrictions of a railway, but it's growing better now, and we are shipping on much higher capacity than it was over the second quarter. We are producing -- sorry, we are continuing construction of the Sutara deposit. We expect it will be operational in the end of the next year. Our current production is around 80%. And -- this is a bit limited. We are still limited with the capacity of our mining contractor. But we have already implemented a new one, which helps this company increasing their capacity, and we believe that by the end of the year, situation should be gradually improved. My colleague, Johnny Yuen will pass you through the financial details, but I will announce very proud that we have done a positive profit alert. Price -- the reason why we can do it is a huge increasing from the iron ore price, more than 100% within first half of this year. We have quite a healthy financial position, which once again will be described by Johnny. And we will be -- we are going to make agile shipment by the end of this -- sorry, next month, to have shipment over the railroad bridge across the Amur River, which we were waiting for quite a while, I will give you more details a bit later. We are operating normally in spite of the attempt of on operation authorities to stop our operations. At the end of the day, they decide that we did not deserve the interruption of operations and they apply sensible fine on us. Talking more about railroads, they have some -- can you hear me, Johnny?

Yes.

Talking about the railroad problems, they have some regular some service on their network, which will -- has been finished. And as I mentioned, currently, and they're shipping in a very good manner. We have increased shipments. And in July, we will catch those what we have not shipped in June and in May. To bypass these traffic jams on the railroad, we have -- we are doing some trial shipments in the west direction in order to deliver our concentrate to our clients in China through Zabaikalsk border crossing point. And we also continue our testing shipments to the South China clients, which we are doing through the seaport on the Pacific Coast of Russia. I think that's it about our main facts, and I will be happy to answer some questions later during Q&A session. And now I would like to pass to Mr. Yuen to guide us through our financial results of this quarter. Johnny, please?

Thanks a lot. So we have our presentation slides upload on to our website. So if you turn to Page 9 of the slide, it shows our liquidity as well as cash position as of the end of the second quarter. What we have is that we have a cash balance of $67 million. But I want to highlight the fact that obviously, $67 million is a very healthy cash balance when compared with our cash balance last year. And more importantly, the $67 million cash balance is arrived at after repaid $70 million to Gazprombank in the first half of the year as well as $40 million payment to Petropavlovsk as guarantee fees. So we intend to repay of $30 million to the bank as well as to Petropavlovsk, and we still got $67 million cash. Our debt at the quarter end was $194 million. So we will -- we have been repaying the Gazprombank loan according to schedule. But then in July, we believe that we have so much cash that we should lower our gearing as well as improve our finance costs. And so we prepaid $20 million to Gazprombank as an early repayment. So at this very moment, our loan due to Gazprombank Bank is around USD 174 million. Turning to Slide 10. It's a chart showing how healthy the iron ore price has been. Obviously, we all know that iron ore is probably one of the best performing commodities in the market. And today, we are looking at a cash -- iron ore price of around USD 230 per ton, and it has just been subject to a healthy correction. It was $250-something. But $230 is still a very healthy price level. Slide 11 shows the Russian ruble movements of -- Russian ruble remains weak, is now trading at around RUB 74 rose to $1, which is still very, very low. I mean we used to be RUB 65 or something like that. And when we were first listed in 2010, it was like RUB 30. And so Russian ruble is also working in our favor. Slide 12 shows the price premium for 65% iron ore versus 62% iron ore. Obviously, I would need to reiterate the fact that K&S produces 65% iron ore. And so we are looking at blue curve of the chart. The good thing is that the client premium for 65% iron ore has been increasing. So we are looking at a very, very strong premium of $20-something for this price premium, which is beneficial to us. And Slide 13 is again showing the LIBOR movement because as we have just discussed earlier, we have a loan due to Gazprombank, and it is based on LIBOR and LIBOR has been very low. It's literally close to zero. As of today, the LIBOR rate is somewhere around 0.18 or 0.13. And so the low LIBOR is helping our finance costs. So with all that, we had made a positive profit alert in early June. Our first 4 months of profit somewhere around $66 million. I will be able to give you more update about our second quarter or our half year results by the end of August when we release our first half financial results. So stay tuned for that -- For the time, Yury, let me hand the call back to you, and you can talk about the competitive advantages of IRC and obviously, the exciting news about the bridge.

Thank you. Thank you once again. It's a usual slide for our presentation, but for those, our potential investors who have not seen it, I would like to underline that we are only one iron ore producing company in the Far East of Russia. We are enduring good price level. Our currency, which we are operating in Russian ruble, which is also favorable for the production because of gradual depression for the support of the industry in the country. As our CFO mentioned, our LIBOR is decreasing, which also helps us to save money on the financial costs, not savings that we have done repayment, which also decreasing amount of money we are paying for the interest. But the most interesting now is the Amur Bridge, which will help us to deliver our production to our plants in the Northeast of China in even more favorable way. Talking more about the bridge, you can see on the slide which -- one as bridge #22. That construction of bridge is almost finished. And we have an invitation from the Russian railroad to do test shipment over the bridge on 26 or 29 of August. Can't remember exact date now. This shows that they are already in the process of the commissioning of this -- of this construction. They expect, according to the informal information from them that by the end of the year, bridge will start or early next year, bridge will start to operate in a normal regular way. But even this trial shipment is really very interesting for us because it will show us that we can start to bypass those traffic jams, which I mentioned previously. And we hope that we will avoid same problems in future. You can see on one of the pictures, the connection of the rails from both Chinese and Russian side, which was kind of a very important event on the construction site. I think that's it from my side and from the side of IRC, and we probably can switch to the Q&A session.

[Operator Instructions] Our first question comes from Alex from UAE.

Yes. I would like 2 questions. The first one is on the guarantee payment. It seems that the guarantee payment in the second quarter was actually higher than you paid for the full year in 2020 and 2019. So -- and probably implied yield is more than 20%. Maybe you can explain the reason for such high payments to Petropavlovsk. And the second question is related to your formal press release in early June. -- taking the net cash at the end of May. So it seems that you generated negative free cash flow in June. So maybe you can also explain the reason for this even taking into consideration relative to high payment to Petropavlovsk, given the fact that iron ore volumes were pretty key, and iron ore prices were extremely high at that point of time.

Johnny, please explain to us.

I can take those questions. Thank you. The first question talked about guaranteed fee payments. As you rightly pointed out, we repaid a large sum in 2021. Now that is because of the fact that when we first have guarantee range -- guarantee fee arrangement with Petropavlovsk. Petropavlovsk has kindly allowed us to defer the payments. But obviously, as you know, in the past 1 or 2 years, our cash position wasn't really that strong, and Petropavlovsk allowed us to delay the payment until the time when we have the ability to pay. So the ability to pay is now. So that's why in 2021, we are catching up with the payment. We are paying what we have accrued in the past. And so as right now, yes, we are paying more, but we are just paying what we own them in the past. We are now on track. We have now paid them all the outstanding amount due in the past. And going forward, it will just be a month-free normal payment. So that answers your first question. And the second question talks about cash finance. As you rightly point out, I think our cash balance when you compare with May 1 as far as June 1, there's a slight decrease. But basically, the main issue is because of the fact that we need to make the payment, the second installment payment to Gazprombank because this Gazprombank repayment is being repaid on a quarterly basis, i.e., March, June, September and December. And so we have to make that June payment, which is around $9 million. And so obviously, there are some other working capital movements here and there. So you might see a slight drop in cash balance, where you look at the May closing cash balance and the June closing cash balance. I hope that answers your question.

Yes. All right. But I was referring to the net debt. So net debt at the end of May was $124 million, while net debt at the end of June was $127 million. So even taking consideration like payments of Petropavlovsk mean that for the negative...

Net debt -- well, okay. Net debt is -- you're looking also at the cash branch, right? So when you talk about that, that is cash minus the loan. And obviously, okay, fair enough, at that, but that's also working capital movement in the -- during the period as well. So it's difficult to do a cash flow comparison on a month-by-month basis.

All right. And maybe you can provide some comments on CapEx as well for this year.

We don't have any guidance on that, but I think most of the CapEx we spend this year will be on Sutara.

All right. And sorry, just maybe I can address also an issue with the potential change in the controlling shareholder. So maybe you can also elaborate a little bit on this.

Right. So you -- I think -- let me answer this question, and you can supplement that anything. So I guess you're referring to the announcement that we made in respect of stock. We don't have any update since we made the announcement in May, in late May. So I guess the Board is now on the call of investors as well as in POG because at last -- in the announcement, the deal is subject to the release of the guarantee from Gazprombank as well as either we get better opinion from the Board directors of POG or the bondholders of POG or Petropavlovsk approve the transaction. So basically, the Board on the court of Petropavlovsk as well as investors. So I don't have any update at the moment. But if got any, obviously, we will make the announcement.

[Operator Instructions] Our next question comes from Mr. Leng.

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[Foreign Language] The question talks about Sutara and Mr. Leng would like to know what the expected CapEx will be. So I think you can take this question. But I think at this moment, we don't have a specific guidelines featured for the market yet. We understand that the Sutara development will be fully self-funded, and we are very confident that we can fund that. Yury, I mean if you have anything to supplement, please let me know.

No, you're absolutely right. I agree with you. The Sutara -- on Sutara we will need only to build crushing and screening site, power line to this site and some infrastructure like offices, dormitories and so on. So comparing to the main processing plant, it's quite tiny installation.

Understood. Let me translate that. [Foreign Language]

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[Foreign Language] The question comes -- the second question from Mr. Leng is about hedging. Mr. Leng noticed in the trading update that we have entered into further hedging concessions in the quarter 1 of 2022. We have bought some puts and Mr. Leng would like to know what the last put is. So Yury, let me answer that question. We -- so basically, we tested the downside risk. But then the upside that low cap on the upside. So if the iron price is high -- is as high as we can, we can enjoy the high iron price as much as we can. So that low downside risk, but obviously, there will be an initial payment to buy that put. But we believe that this is the best way to protect the company. So that's why we did the put. [Foreign Language]

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[Foreign Language] Mr. Leng believes that it's basically supportive that we should buy put rather than steel fourth quarter because steel fourth quarter has a cap. And that cap is actually giving us quite a bit of a hedging loss in the past years. So Mr. Leng believes that we should be very cautious and not to have a cap. And exactly that's what we are doing. [Foreign Language]

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[Foreign Language] So Mr. Leng, again, I reiterate that we didn't have the cap in hedging policy and I explained that the -- having the cap is one way of the hedge because it's the zero cost call, so we don't need to pay. The downside of that input, is that obviously that the initial payment to put. And so -- that's why we had this zero cost call in the past. [Foreign Language]

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[Operator Instructions] Kent, would you like to wrap up the call? Thank you.

Thank you. So thank you. [Foreign Language] Thanks for coming to our -- joining our conference call today. We appreciate your time. If anyone has any questions please feel free to contact us at www.ircgroup.com.hk. Thank you, and have a great day. Bye-bye.

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