IRC Limited (1029) Earnings Call Transcript & Summary

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

Thank you. Good afternoon, everyone. I want to welcome all of you to IRC Limited, 1029, 2021 Interim Results 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 Q&A session, which you can ask in English, Mandarin or even Cantonese, will follow the formal presentation. So as a reminder, this conference is being recorded. Announcement and the PowerPoint slides, all we'll be using for this call, have been uploaded to our website, www.ircgroup.com.hk. [Foreign Language] It's now my please to turn the call over to our CEO, Mr. Makarov. Mr. Makarov, you may start.

Thank you, Kent, and good day, ladies and gentlemen. I'm very happy to report on the figures of this first half of the year. I should admit that it was one of the best periods of our operations. Obviously, we were impacted by the increasing of the iron ore, which helps us to increase revenues, EBITDA and cash balance on our accounts. Johnny will give you exact figures, but you understand that with these figures -- with this price, our operations were very profitable. Within the last months, price decreased a little bit, but still, it's much higher if you compare it with the same period of the last year. This remarkable price level allows us to decrease the amount of money we owe to the banks. We have done some forward repayment. We decreased our cost of debt servicing for the next year. Our current cash balance is $45 million, which is enough for all our operations and which is most important for the development of the Sutara deposit. Our -- as I mentioned, our achieved selling price is much higher comparing to the previous year. It's more than $180. This has been affected by the small decrease in production and sales, which can be attributed by the not ideal performance of our contractor -- of our main contractor for the mining and for the railroad delivery. But both of these figures are gradually improving and which is very important in our July shipments. We have done a historical report, which means that we -- that railroad company, Russian state railroad company have improved their performance dramatically. I will be happy to answer questions after the presentation. But now, I would like to pass the process to Johnny Yuen, who is our financial head, and he will guide you through the exact figures. Please, Johnny?

Thank you, Yury. We have uploaded our presentation slides onto our website, so let's refer to that slide -- to those slides. I will turn to Slide 7 of the presentation. That summarizes our income statement for the first half of the year. Our production has gone down by 6%, but that is mainly because of a mining contractors' issues. As we have previously reported, the mining contractors are trying to catch up the mining volume lag. So we are being hindered by that, but still, we managed to operate at around 84% of the capacity, which is still quite high level. Sales has also gone down accordingly because of lower production, but we were also affected by the railway congestion issues, as mentioned by Yury. The condition is now getting slightly better. So hopefully, shipments will go through more quickly in the second half. So despite a lower production in sales volume, we are benefiting from very strong iron ore price in the first half of the year. If you look at the Platt's 65% iron ore average price, it has gone up by literally 100% from $105 per tonne to $211 per tonne. And that is reflected in our achieved selling price which had also doubled, which is -- that is very, very helpful to our bottom line. Our cash cost has gone up a little bit by 34%. But I need to highlight to you the fact that while the cash cost is at $65.6 per tonne, the increase is attributable to basically 2 factors: a, the mining fee because we have a longer haul in distance as well as the mining contractor is demanding for higher rate, we're trying to catch up the mining; and b, which is most importantly, the increase in transportation cost because, as I mentioned earlier, we are suffering from this railway congestion issues, and so we are diversifying more sales to seaborne customers. Selling via seaborne is more expensive because of higher transportation cost. So that's why we're seeing a higher cash cost here, reflecting the higher transportation cost. But the good thing about the seaborne sales is that the achieved selling price is also higher than the price that we can achieve with -- if we are selling through railway. So that offset part of the higher transportation cost. So let's move down the P&L. If you look at our revenue, it has gone up by 104%. So we reported revenue of $224 million. Hedging losses, slightly higher than last year because obviously, we have very strong iron ore price this year. And so we incurred a bit more hedging losses. All in all, our revenue is still USD 217 million, which is still more than double of what we achieved last year. Site operating expenses have gone up, which is mainly due to the high cash costs which I've just explained. General admin has also increased, but that is mostly because of the fact that we delayed some of the process -- some of the activities last year because of COVID, and now this is mostly a timing difference. And so if we move on -- moving down the P&L. We achieved a very healthy EBITDA of USD 123 million. Taking into account depreciation as well as financial costs, our underlying gain this year is USD 101 million, which is a very substantial increase when comparing report we did last year. If we take out those nonrecurring items as well as the FX, foreign exchange, we report a profit of USD 98 million. What is very interesting about this number is that, as you all know, our current market cap is somewhere around USD 220 million, USD 240 million. So literally, this half year profit is representing almost half of our market cap. So that's just to put this number into perspective. And if you turn to Slide 8, that shows our balance sheet. I think that nothing really surprised during this balance sheet, apart from the fact that we have a higher receivables, but that is mainly because of the timing difference in the cash flow. Because when we are increasing our sales because of higher iron ore price, the accounts receivables also increase accordingly. We are building up more cash. We are reporting a cash balance of USD 67 million at the end of the year -- or interim end. We are also reducing our Gazprombank loan. So all in all, our net debt is showing a significant reduction. Our net debt as of the interim end was $125 million, which compares positively to the net debt amount at the year-end, which was USD 181 million. Let's move to Slide 9, which is a summary of our cash flow. Net cash generated from operations, a lot higher than last year because, obviously, we had very strong revenue this year. We paid some guarantee fee to POG, our guarantor. And then we repaid loan according to the schedule. We spent some CapEx on Sutara. And all in all, we are -- we have a cash increase of USD 47 million. And that, together with our opening cash of $20 million, we reported closing cash of $67 million. But that is not the end story. If you turn to Slide 10 which will show you our financial profile or liquidity during the period. So we have a cash balance of USD 67 million. Total outstanding debt as of the interim end was USD 194 million. Now that is essentially -- truly represent the Gazprombank loan. Now because of the very strong cash flow that we have, we have early repaid $50 million to Gazprombank. So the debt as of today is USD 144 million due to Gazprombank. So that shows our repayment profile as well as liquidity position. I'm happy to answer any questions we will have in the Q&A session. But in the meantime, I'll pass the call back to Yury, who will talk about the advantages that we have. In particular, he has some exciting news about the bridge. Yury?

Thank you, Johnny. Yes, as everybody knows, we are located very close to the Chinese border in the forest of Russia. We, yes, are doing quite a high-quality product, which is close to 65% ferrum. Our weak currency helps us to operate as well. As I mentioned, we -- and we are paying less to the bank because of the lower labor, and we will decrease this figure further because of the early repayment this year. But what is most attractive is the potential savings of then -- on the transportation costs because of the commissioning of the railroad bridge, which is connecting Russia and China over the Amur River. This bridge was under construction for quite a long period of time. It's completely ready on the Chinese side. Russian side is delaying the construction. But recently, a couple of weeks ago, there was a first locomotive crossed the bridge, which means that this -- which is technically ready, and now they are in the process of the commissioning. I can't report on how long will this commissioning be, but when it will be ready, we definitely will enjoy this improved transportation facilities. I think that's it, and we probably can move to the Q&A session.

[Operator Instructions] Our first question come from [ Percy ].

Can you hear me?

Yes.

Apologies. Thank you for your report, and I have a number of questions. My first question is that given the improved financial health of the business's balance sheet and cash flow, are you considering refinancing the Gazprombank facility over the course of the rest of this year? And would that -- and I assume that would also mean an end to payments to Petropavlovsk for the guarantees they're providing. Could you give some color to that, please?

Yes. [ Percy ], thank you for your questions. Let me answer this first question. Yes, indeed, I think we are looking at our refinancing. But obviously, refinancing the loan with [ this amount ], even though it's now in a lower level because we already paid some loan principle, it's not an overnight job, especially to think the kind of fact that we are sort of like a Russian-based company. And so -- but I can also tell you that we are actively looking into that, and we will -- if we have more update, we will loop it to the market.

My second question is, there's a 34% increase in cash costs, which you attributed to stripping costs and freight costs. Are we then seeing a stabilization in cash costs assuming constant currency? Or are we going to see some decline as the bridge gets commissioned?

Yes. Good question. I think, obviously, cash costs comprised of a number items. As you rightly pointed out, mining cost is an issue. But more importantly, the shipment costs because of the fact that we are shipping to the seaborne customers play a large part in the increase. But obviously, if the railway congestion issues improve, then we can lower our seaborne shipments, which would, in turn, lower our cash costs, i.e., lower transportation costs. In terms of ruble depreciation, we saw a significant depreciation last year in March where the currency reduced or depreciated to around RUB 80-something, and then it stabilized at around RUB 80, RUB 75, somewhere around that. And we allow at -- currently, the ruble is at this RUB 75 level. Obviously, I don't have a crystal ball, and we don't know where the currency is going. But that -- what I can say is that this RUB 75 exchange rate is relatively weak because I've been with this company for more 10 years. When I first joined, ruble was around RUB 30 to U.S. dollar. So I think this is a very weak level already, and we are benefiting from it.

Okay. And so my last question is, there've been some issues with the mining regulator and documentation, and I wondered if you've got an update on that. And if not, when do you anticipate being able to get -- to file all the necessary documentation and getting you all clear?

Yes. Yury, I think this is a question for the RTN. So perhaps, if you can answer [ Percy ].

Sure. Yes, they have some issues. They are not affected our operations. We are in the process of preparing of the documents. Two days ago, there was a meeting which was headed by the local representative of the President. In this meeting, we were meeting with Rospotrebnadzor, and we made a report on our progress on the preparation of the papers. They were completely satisfied. And we -- does not expecting any aggressive actions from their side. According to the schedule, we are going to finalize this process in the first half of the next year. Obviously, we are doing it as fast as...

[ Is this ] in the first half? Sorry, I missed -- I wasn't sure I heard you then. In what period?

Next -- first half of the next year.

So I think, [ Percy ], if you allow me, I think this is an ongoing process, and so we cannot give a specific timeline on when we'll achieve that. I think what we are doing is that we are working very closely with the authority, and we are making very good progress. But again, this is Russia, and so it's very difficult to put in a specific timeline.

Our next question comes from [ Daniel Chan ].

Can you hear me?

Yes.

Yes. I have a question about the guarantee fee. It seems to vary from year-to-year. What are the exact terms of the guarantee fee? Is it based on an outstanding loan size or other factors?

Yes, Mr. [ Chan ], thanks for the question. Let me take that. Yes. The guarantee fees provide a base on the total loan outstanding balance as a percentage of 3.07%. So the accrual, the provision, is a fixed percentage. But then you have rightly pointed out that we repaid our credit loan guarantee fees this year or in the first half of 2021. Now that is because before this year, obviously, our financial position wasn't very nice. So we were owing our guarantor, POG, a certain amount of fee. So we have said -- so our guarantor is kind enough to say that, "Right. I know that you are not in a very good position, so let's defer the settlement until you have the ability to pay." Now that ability to pay comes in this year when we have generated more cash. And so that's why we are catching up and trying to repay the owed -- the outstanding guarantee fee that we owed Petropavlovsk. We are doing that this year. And so that's why you're seeing a larger amount of guarantee fee payment this year. But I'm most happy to report that we have repaid up all this amount due in half year. And what we are going for -- what we are paying now is only the amount that's being due on a month-to-month basis.

Since IRC is in a better financial situation now, is there any plan to negotiate with the Gazprombank to drop the guarantee altogether?

Wow. That is a very good question. Actually, we have been having a lot of conversation with Gazprombank. They are aware that we are getting much stronger in terms of financial health. But I think you also have to understand that the bank -- from the bank perspective, they're saying, "All right. Nice. Well done," but then they will be happy to have additional [indiscernible] from whoever, this time from POG. And so from that perspective, obviously, they're a lot particularly eager to reduce the guarantee, which is understandable from a bank perspective. So from us, while we're having conversation with them all the time, we are early repaying the debt to: a, reduce the guarantee fee as well as secure our interest; and b, also put us in a better position to remove the guarantee.

My last question is regarding the violation with RTN. What's the scope of the violation? And has the problem been ratified? Or is there some more issues still coming up?

Yury, RTN issues, perhaps you can answer Mr. [ Chan ] about his question.

Thank you, Johnny. Yes, as I mentioned, we are in the process of ratification of this problem. We are going to finalize these next year, but there are no -- any signs of the interruption of the operations. And once again, I'm happy to repeat that a couple of days ago, we've had a meeting with this authority. And this meeting was under the supervision and -- this meeting was leaded by the representative of the President of the country on the forest -- or sorry, in the Jewish Autonomous Republic. And during this meeting, RTN was completely satisfied with what we are doing and doesn't make any signs of them -- of the potential aggression against the company.

[Operator Instructions] Our next question comes from [ Leung Hang King ].

[Foreign Language]

Okay. [Foreign Language] Yury, this question is about the bridge. Mr. [ Leung ] would like to know whether there's a trial shipment on the bridge and whether -- when there will be -- when we'll know that the bridge will commissioned, and if there's anything you can add about the bridge.

There was scheduled one shipment which was postponed because of the COVID restrictions. That's answer to first part of the question. And second one, according to the last media releases, they are going to commission it in the first half of the next year. But it was quite a while ago. And I don't know, maybe there are new information about it. But last one which we have seen was early next year.

Okay. Thank you. [Foreign Language]

[Foreign Language]

Okay.

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language] 100% [Foreign Language]

[Foreign Language] So Yury, this question is about production. Basically, Mr. [ Leung ] has asked 2 questions. The first question is about production. He asked what are we -- where are we in terms of the mining? We hear -- he's aware that we have this mining contractors' issues and how we are dealing with that. And is it possible to achieve 100% capacity? So that's the first question. The second question is about RTN, which I can answer based on what you have said. But for the first question about mining as well as our production capacity, great if you can give us some color on that.

Of course. Yes, it's very important question for us. It's one of our main restrictions now. We have implemented a new contractor who -- additional contractor who is helping us to increase volumes. Also -- and this new contractor operating since March, which helps enormously, but main contractor, unfortunately, decreasing their performance, which is forcing us to continue this process. And we are in the process of negotiations with couple of other potential contractors. So I believe that by the end of the year, we will manage to improve the situation, but we should not forget that because of the -- quite a long period of poor performance, we have collected quite a big amount of cubic meters which have not been mined. And we need some time, even with the proper operating contractor, we need it to -- we need time to catch this amount which we have not performed within last time. And second question is about RTN. Yes, please, Johnny, you know...

Yes. Let me answer the RTN part in Chinese to Mr. [ Leung ]. For the first part, let me translate the answer to Mr. [ Leung ].

Yes, please.

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language] trading loss [Foreign Language]

Yes. This question is about trading loss. We have a lot size of 2,000 shares. So let me answer that. I think we are looking at that, but this will be something which we need to look at. [Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Operator Instructions] Gentlemen, there seem to be no further question at this point in time. Would you like to conclude the call, sir?

Okay. Thanks. [Foreign Language] 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 call us and/or visit our website, www.ircgroup.com.hk. With that, thank you, and have a nice day. Bye-bye.

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