IRC Limited (1029) Earnings Call Transcript & Summary

Good morning, good afternoon. Welcome to the conference call. Chairperson today is Kent Lo. Please begin your call, and I'll be standing by for Q&A. Thank you.

Thank you. Thank you, everyone, to join our conference call today. Today is IRC Limited 2021 Fourth 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] So as a reminder, this conference is being recorded. Announcement and PowerPoint we'll be using for this has been upload, and you can download 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 can start now.

Thank you, Kent, and good morning, ladies and gentlemen. This quarter was quite challenging I would admit. Our sales were 2% higher, but production a bit lower than it was improved in previous quarter. We are developing our new Sutara project, and we are going to start operations there later this year or earlier -- at the beginning of 2023. We have done a big repayment to our -- to the bank which gives us a loan for our construction. My colleague Johnny Yuen will give you more details on that. Our cash balance is quite healthy. It's once again very positive. We have some flexibility this year. We enjoyed a good price of our products, which was higher comparing to previous year but at the end of the year was a bit lower. Hopefully, it will be recovered. We believe that by the end of the year, we will enjoy the better transportation facilities for our products after the commissioning of the newly built bridge across Amur River. Giving more details on Slide 7, there is an information about what have affected our production. We were limited with the performance of our mining contractors and, consequently, the lower ore quality because when you are not delivering the cubic meters, you can't effectively control their ore grade. So that was one of the reasons why our ore production was lower. Another reason was the restrictions on the Chinese border based on the COVID reasons. They are -- the situation there is a bit better, but still there are some restrictions which are not allowing to operate smoothly. Talking about the performance of our constructors, we are still looking for a new contractor and thinking about ability to -- thinking about possibility to organize our own mining fleet. And once again, we are very glad that performance on the construction of all necessary facilities to Sutara deposit, and this process is going on very efficiently. We believe that by the end of the year, we will start delivering ore from this deposit. I think that's it, and I will be happy to answer questions later if there will be any. But now I will pass to Johnny to give all the detailed financial information about this quarter. So please, Johnny, go on.

Yes. Thanks a lot, Yury. If you turn to Slide 9 of our presentation slides, you will see our cash and debt balance as of the year-end. We closed the year with a very healthy cash balance of USD 52 million. And our loan due to Gazprombank has been reduced to USD 113 million at the end of the year. I think all in all, 2021 has been a positive year for IRC. We managed to pay $102 million to Gazprombank, out of which USD 70 million is very early repayment of the loan. And so we have successfully repaid half the debt as of now. And when we do the early repayment, we will repay the more expensive tranche. So if you look at the lower part of the slide, it shows the loan profile. More expense tranche being LIBOR plus 7.7%, successfully we repaid $70 million of this tranche and only outstanding finances in this chart is $10 million. And so we are successfully reducing gearing as far as the loan balance and improving the balance sheet of the company. I would like to add more color but -- to this, but we are still closing the books for December 2021. And by March, when we issue our full year results, I'll be able to give more color and more details about our performance in 2021. So we'll probably give a lot more details by March. And until that time, we will continue to work as hard as we can. Yury, this summarizes my presentation in the cash and liquidity. And can I hand it back to you for disrupt your competitive advantage of IRC on Slide 11?

Thank you, Johnny, for your information. That's a usual slide which we always trying to remain to our shareholders existing and potential future shareholders and that we are situated just on the bank -- almost on the bank of Amur River, not far from the Chinese border crossing point. So we are very effectively situated. Even under the COVID-19, we are still producing and deliver our product to China. Good pricing for our product for all last year and year before the last helps to be financially successful and paying our loan in advance. Quite positive for the company is depreciation of the Russian Rouble. It is quite weak now, especially on the background of these political tensions, which everybody can observe around. So summarizing all above, company is in a quite good situation, quite a good environment and quite a good form and progressing with the development. And I think that's it, and we will be more than happy to answer your questions.

Yes. So we can start Q&A.

[Operator Instructions] We have a question coming from [ Sam Seb ] of Autonomous Capital.

I was wondering if you could talk about your plans for deploying your cash flows once you pay off your debt.

I will answer your question. Question is you mentioned about the point where we pay off the debt. Can you clarify the question a little bit?

Yes. Maybe if you think about your potential free cash flow after you repay your debt, I presume that maybe over the next year, you should have enough cash to pay off your debt. And so the question is, how much, maybe, you might spend on CapEx? And how much, may be available for other uses, for instance, maybe dividends or other potential uses of cash?

Right. Understood. Yury, let me take this.

Yes, please, Johnny.

Yes. Well, that's actually a very good question, but your question by itself involves a full-scale cash flow forecast, which is, to a certain extent, we are -- it is very difficult for us to explain this to you while on this call. But I guess the thing is, we -- our cash flows are subject to a number of factors, i.e., production volume, sales volume and, much, much more importantly, the oil price. And so it is indeed a bit difficult to say what we are going to do after we repaid that. I guess the thing is, from my -- from our perspective, what we are doing now is that we have to leave out a bit of cash for development of Sutara, which is our primary importance in our agenda. And the second thing is, obviously, we want to lower the debt as much as possible. And thirdly, which is also a very, very important agenda point for us, is our dividend. So -- but then all these 3 elements will very much depend on the type of debt, oil price, production volume. But obviously, those are external factors, but our target is obviously the 3 points that I just mentioned: Sutara, debt and dividends.

Can you quantify the CapEx needed for Sutara?

Yes. We estimate that this whole Sutara project, we will need around USD 45 million. And we spent a little bit of that already because we have already started the development of Sutara. We expect that we will be able to fully finance the development with our internally generated cash. Obviously, $45 million is not a huge sum, so we're probably able to fully finance the development of Sutara with internally regenerated fund.

And would that be Phase 1.5? Or will that include Phase 2 to go from capacity of 3.2 million tons to 4.6 million, which would be 1.5 million? Or does that take a Phase 2 to 6.3 million tons per annum?

Good question, Sam. So you have been really looking at us. Indeed, I think Phase 1.5 as well as Phase 2 are in the pipeline. But all in all, I mean, no matter what -- how we look at it, whether it is Phase 1.5 or Phase 2, we still need Sutara to come into play before we can incorporate or we can commence Phase 1.5 or Phase 2 because the thing is, we do need the accurate supply of feedstock that is produced or from Sutara before we can substantially support the production of Phase 1.5 or Phase 2. So again, we'll be focusing on Sutara this year or early next year. And obviously, we will see how it goes and then the plan to add about how we should move on to Phase 1.5 or Phase 2.

Okay. And you mentioned the stripping ratio had increased. Is that something that is permanent in your estimation as you keep mining with the quality decrease? Or is it just a temporary phenomenon?

I'll try to answer that. But if I miss anything, [ please understand ]. I think the idea is that we are now reaching to a point where the Kimkan pit is reaching the end of its life. And inevitably, the stripping ratio or the ore quality of Kimkan is not as good as it was a few years ago. And so essentially, we are in a transitional period where Kimkan is slowly depleting, but we are developing Sutara at the same time. So we are doing kind of like a transitional period. And so during the transitional period, we will have to suffer a little bit in terms of this Kimkan ore quality. But when Sutara comes into play, the ore quality will be better. And so then to answer your question, yes, it is a kind of short-term impact for us. But we kind of like expect that we will have this short-term impact during the whole life of the project, which is more than 30 years. So this is part of our mining plan.

We can add, Johnny, that after we will start Sutara, after initial preparation works of the pit, stripping ratio will be low for a certain period of time.

[Operator Instructions] There seems to be no other questions. May I pass the time to Kent.

Okay. Thank you. [Foreign Language] www.ircgroup.com.hk. We are now ending the meeting here, and thank you very much for 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. Thank you. Bye-bye.

Thank you, everybody.

Thank you.

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