IRC Limited (1029) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to the conference call. Our Chair person today is Kent. Kent, please begin your call, and I'll be standing by for the question-and-answer session. Thank you.

Thank you. Good afternoon, everyone. I would like to welcome all of you to IRC Limited Stock Code 1029 2021 Annual Results Conference Call. With us today, we have our CEO, Mr. Yury Makarov; our Deputy CEO, Mr. Danila Kotlyarov; and our CFO and Company Secretary, Mr. Johnny Cheong Yuen. [Operator Instructions] As a reminder, this conference call is being recorded. Announcement and PowerPoint slides, we'll be using for this call have been uploaded to our website, 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, Kent, and good morning, ladies and gentlemen. We are very pleased to declare the figures of 2021. And the most important is the underlying profit, which is reflected on our presently -- in presentation on Page #5. It reached $125 million, which is 5x more than it was last year. More about financial figures -- more information about financial figures, we'll give you Johnny Yuen, my colleague. I can add to this information that during the period, we produced and sold approximately same amount of material. Our mining and blasting operations contractors, they are performing a little better than it was last year, but still, we are suffering from some underperformance of -- we are still limited with some railroad indication. And we believe that this situation will be improved quite soon, but still because of the COVID restrictions and because of some geopolitical situation railroad transportation to the east of our country is not very well right now. We have done quite a lot of time to debottleneck this area, we have studied seaborne transportation. But we believe that the basic change of situation will be after the commissioning of the newly built Amur Bridge, which is only 300 kilometers from our mine. We are performing quite good in the construction of Sutara, which helped a bit high grades of concentrator for ore. And we believe that by the end of 2022 or early 2023, we will start operations at this mine. Once again, the progress on the construction site is quite good. I think that's it about operations, and I will be happy to answer questions. Meanwhile, Johnny, please guide us through the financial figures.

Sure. Thank you, Yury. If you can turn to Page 9 of the presentation slide, that summarizes the financial results overview. Top line, let's look at our production numbers first. We produced around 2.6 million tonnes of iron ore, which is down by 7% when compared with last year. Now we are being hampered by the mining contractor issues as well as our poor ore quality problems. But all of these are short-term issues, which we are handling, we are dealing with. And -- so we produced 2.6 million tonnes and we sold 2.6 million tonnes in 2021. So essentially, whatever we produced, we sold. And moving down the line, iron ore price was exceptionally exciting. It went up on average by around 53%. And so that helped our profit and loss account tremendously. Our chip sand price is $159 per tonne on a dry metric tonnes basis. And that gives us a net revenue of USD 371 million. Cash costs also higher because of the fact that we are diverting more of our sales to seaborne customers. Now as you all know, when the seaborne -- while we are saying that the seaborne customers, there's a longer transportation route, i.e, more expense and cash cost. So that's why our cash cost, it goes up. But also, we would like to highlight that those seaborne customers offer a better price in terms than the railroad customers. So moving down the line, we've got a very healthy growth in EBITDA. Our underlying gains is $125 million, which is as Yury has mentioned. So these are all key numbers. But if you can turn to Page 10, that is essentially I believe summary of our P&L. I'll quickly go through the numbers. Revenue, net revenue -- sorry, gross revenue is $382 million, up by 62%, hedging losses, $11 million. Now obviously, we did very strong iron ore price last year, is inevitable that we made some hedging losses. But also important that the hedging is for risk management purposes, this is not for speculative purposes. So taking our hedging, our net revenue is USD 371 million, which is 65% higher than last year. Cost is also higher. As I mentioned, because of the transportation cost as well as the higher mining costs. General admin and then other income, these are all normal items. And then we end up with an EBITDA of USD 171 million. Again, that is a very healthy growth when comparing with last year of USD 39 million. Moving down the line. I want to highlight is the financial cost. It dropped by 28%. That is resulting from a combination of factors, mostly because of the fact that we repaid $91 million of our loans due to Gazprombank because last year was very good year, so we have surplus cash and so we believed that it's worthwhile to pay off that to reduce the gearing as well as to reduce the interest cost. And also -- we also -- and so we have a lower financial cost. And at the end, we have a underlying gains of USD 125 million. This is an exceptionally good number. But if you look at our market cap today, it's somewhere around USD 118 million. So that is essentially around 2/3 of our market cap. There are some nonoperating or nonrecurring items as usual. The most notable one is the gain on liquidation of Kuranakh projects. Now for those of you who don't remember, we had this Kuranakh project in operation until 2015 when iron ore prices was so low that we have decided to put it under care and maintenance. And subsequently, the project was in liquidation in order to take cost. Now the liquidity project has completed this year or 2021, and so we can remove Kuranakh from our financial statements. And by doing that, we can write back some of those provisions for closure costs or other payables. And so we record a noncash gain of $12 million. And then moving down the lines, we don't have any reversal of impairments when compared to last year. We have $76 million reversal of impairment. But all in all, we are reporting a profit of USD 134 million. Again, this is an exceptionally good number. Let's quickly move down to the balance sheet, which is shown on Slide 11. Basically, I think there are only 2 things that we need to look at are: a, net asset increased by around $130 million. That is essentially our profit for this year. And the other line, which is very interesting, is the net debt being shown at the bottom part of the slide. Now these numbers are expect it's very low, as low as USD 60.5 million. That is the effect of us early repaying the loan as well as our strong cash flow generated during 2021. Talking about cash flow, let's quickly look at our cash flow statement in Slide 12. I mean top line says it at all. I mean, we've got $166 million net cash generated from operations. As I mentioned earlier, we have utilized our cash mostly to reduce our debt. So we repaid the loan by $91 million. And we also took the opportunity to pay off some guarantee fees due to Petropavlovsk of $14 million. We spent some money on CapEx because we need to develop Sutara and as Yury has mentioned, the development of Sutara is on track and it's going well. So we spent around $13 million on CapEx, mostly on Sutara. All in all, we have generated cash of around $32 million for this year. And taking into account the opening bonds of $20 million, we closed the year with USD 52 million. Slide 13 is the debt profile. As I mentioned a couple of times, the right part of the slide shows our early repayment of the loan of $91 million. And another interesting part I want to highlight is that if you look at the green bars at the right-hand side of the chart, is showing that we need to repay $20 million each year as a loan repayment. Now that is not a significant amount. I mean that shows that it will be quite easy for us to service the debt allowing us to develop Sutara or pay some dividends. So I think from a debt profile perspective, we are looking quite good. So that concludes my session. Again, I'm happy to take any questions you might have in the Q&A sessions. But for the time being, let me hand the call back to Yury, who will talk about the sanctions as well as our advantages. Yury, please?

Sure. Thanks, Johnny. A quick review of our advantages is reflected on the Page 17. And they are the same, but still I would like to, for example, we are still producing under the COVID restrictions. Actually, they have not affected us materially. We are improving our financial and operational figures. At least we are trying to do it. Prices of iron ore helps us to reduce our loan as Johnny mentioned a couple of minutes ago. We are producing a high-quality product, which is priced by the 65% plus price index. Russian currency quite weak, and it helps us as an importer -- as an exporter of the production of what we are producing. Our loan is connected to the LIBOR, which helps us to decrease the financial costs. And the most as I mentioned in the first part of my presentation and the logistics, which was quite effective always, but last year, it was affected by the limitations like COVID and some others. But we believe that all these will be passed after the commissioning of the Amur Bridge, which is under construction, and hopefully, quite soon, it will be commissioned. Talking about the sanctions, which are quite important right now. We are not materially affected with the sanctions. We are operating quite good. Some of our counterparties were affected, but that was not affected us anyhow, and we are operating without any restrictions. I think that's it from me and my colleagues, and we can go to Q&A.

Operator, can start Q&A.

[Operator Instructions] [Foreign Language] And first question comes from Mr. Tung Liu.

Thanks for the results. It's quite good results. I have a couple of questions that I would like to clarify. The first one is on the sanctions. Can you help to clarify why does the sanctions have no impact on IRC and in particular given you are receiving U.S. dollars as your revenue, does this have an impact on any future dividend payment, whether in Hong Kong dollars or in U.S. dollars?

I can probably start answering, this is Yury Makarov. I can answer -- start answering about sanctions. The main reason that we have not been affected is that quite a lot of our customers, they are situated in China and our main revenues come from the Chinese companies, China. But this period of -- these geopolitical turbulence, China is not affected by any sanctions. Hope that will be the case in the future. China will not be affected. So that's quite favorable for us. There were some banks in Russia, whom -- where we have accounts, but we were not using them. So we simply closed this account in these banks like to be and that we are not dealing with them. Another good reason that we are not affected is that a couple of months ago, our main loan provider bank called GPB, it has transferred it's loan to a company called MIC. And because of that, these sanctions also not affecting us as well. I hope I have answered your question about on sanctions. If yes, then I would like Johnny to answer the second part of the question.

Sure. For dividends because if we are to pay dividends, it will be paid by IRC being a Hong Kong company, our share support facility are normally in Hong Kong dollars, so we just paid in Hong Kong dollars as a dividend in case we are at -- by the time we can pay. So I don't see any issues with paying dividend for the time being.

And just to clarify that question a bit further. You are saying that your Chinese customers have no issue in paying you in U.S. dollars despite the sanctions. And that is there also your intention to pay out dividends for -- in the future for long suffering shareholders?

Johnny, can you guide us through that?

Yes. We have no problems receiving U.S. dollar. I think Danila you can also add more color on that. But let me also answer your question for dividend first. For dividend, yes, indeed, the Board is actively looking at paying out dividend. What we are going to do in the first half of this year is to conduct a capital reduction exercise. To make it simple, what we shared to you, what that means is that we made some losses in the past years. We have to offset those losses with our share capital. After which, that will allow us to pay dividends. Now this exercise will be done in the first half of the year, paving the way for us to pay dividend. So the quick answer to your question is, yes, indeed, the Board is looking at rewarding the shareholders with dividends. And talking about sanctions of cash settlement, I think Danila will be in the best position to answer your question. Danila, please?

Yes, Johnny, I can add. In terms of sanctions, I guess the question was about transaction in U.S. dollars as, obviously, you are aware, the majority of sanctions were imposed by U.S., the European Union. And the entities and the companies and the banks who are directly mentioned in the sanctions for European Union or U.K. and U.S., or they said that they have issues in doing the transactions in GPB in U.S. dollars and euro. We are not obviously in the list of sanctions of any of the countries, which I mentioned. We are not dealing with the customers or we're not dealing with other markets who are directly mentioned in the list of the blocking sanctions of EU or U.S., which are preventing us of remitting them euro-U.S. dollar, where GPB will be getting this amount or getting the amount in the U.S. dollar to euro. And on the base of this, we are not experiencing any problems with this. And the banks we're using, Yury mentioned about the list of the banks who have been listed in the sanctions which are preventing them to kind of do a transaction on euro, U.S. dollars in GPB. We are not using -- we're not working with those banks, particularly with the GPB. In any case, there are plenty of banks in Russia with whom we can do the transactions. And currently, as Johnny mentioned, we are not experiencing any issues of getting the remittance in the U.S. dollar, which is the currency. We are supplying our products for our customers in China. And because of this, as we mentioned already, there is no direct impact on us whatsoever.

[Operator Instructions] Our next question comes from Peter with Wardhaven Capital.

Well done on some good results. Could you give us a bit more insight on what you think the cash costs are going to be for 2022? I guess rising fuel prices are going to be a negative, but a weak ruble will be a positive. They were up 40% last year, but perhaps you could give us a bit of color for this year.

Yes. Yury, can I take that?

Sure, Johnny, please.

Yes. Yes, Peter, I think that's a very good one. Indeed, our cash cost is going higher. But if you look at our announcement, we have a table setting out a breakdown of the cash cost, which is on Page 6 of the announcement. Unfortunately, I can't give too much guidance about the cash -- our current cash cost or forecasting cash cost. But if you look at our total cash costs, and I'll explain to you what the revenues are, that will be helpful for you to estimate our forecast what the cash cost will be. Now if you look at Page 6 of the announcement, setting out a breakdown to cash cost, the most driven increase of the cash cost is for transportation to customers. It went up from $15 per tonne to $24 per tonne. Now as I mentioned earlier, that is mostly because of our increasing sales to the seaborne customers. While, obviously, as I mentioned, seaborne customers offer better price. On average, on a good day, the net contribution could be similar. But then generally, we will still be preferring to sell to the railroad customers, especially why the Amur River Bridge, which could be in operation later this year. And so if we ship our sales effort to more inland, obviously, contactors cost will go down, that will particularly save our cash cost. Now the other item is the mining extraction tax. Now this is a government newly -- not currently introduced, but they have changed the formula in calculating mineral extraction tax. So that gives us another $2 increase. And the other more significant item is the mining costs, which are as discussed by Yury, we are now working on Kimkan west. And so we have to catch up with the prior mining volume lag as well as our distribution rate is higher. And so mining costs will be higher when we are mining at the Kimkan west. But the good news is that Sutara is going to come online very soon. So once Sutara is fully up and operational, we anticipate that our mining costs will be slightly better versus the lowest driving rate, but that will be at time when Sutara will be coming to frame. So hopefully, I can give -- given you some color on this.

That's very helpful. And one more question. You think you're running about 81% capacity last year. You've had some problems your mining contractor. You inferred earlier that we expected these problems to ease. Can you give us a bit more detail about when you're expecting to ease and what sort of levels of capacity utilization you see for this year?

Johnny, are allowed to make this forecasts?

Not exactly. I think it's difficult to forecast the production capacity. But Yury, I think we can address the question by what measures we are taking to mitigate the mining contractor issues?

Yes, that's what I was going to do. I was thinking simply clarifying whether it's allowed to do the forecast. Well, what we have done last year, we have implemented a new contractor, which helps us to increase the amount of volume we are mining and blasting and you can actually see it in the figures on the page number of our presentation, I think. You see that amount of cubic meters we have moved much bigger than it was last year. Unfortunately, we are still not satisfied with our contractors, and we are moving into directions further, first of all, trying to persuade them to do more and trying to negotiate some agreements with another contractor. Although this is quite challenging in this situation, but still we are trying to do our best. Hope that helps you well.

Any more questions? Hello?

[Operator Instructions] And we have a follow-up question from Mr. Tung Liu.

My follow-up question is regarding your hedging program. Is your intention to continue with your hedging program in the future? And the other question was in terms of discount to your main Chinese customers, how much of a discount is that to your -- to the normal 65% iron ore?

Johnny or Danila maybe you can clarify our policy?

Let me talk about the hedging program. I think in the current situation, I think let's look at iron ore first is it is very difficult to do any effective hedging because the fourth curve is always in cyber stage i.e., it's always forecasting that the iron ore prices will go lower. And so it's very difficult to do any factor hedging. Now I think that I'm not ruling out the possibility of hedging, but just that if you look at the way we hedge, we allow much, much cautious in terms of entering into new hedging contracts. It seems that we are back of not hedging too much. But again, can I just reiterate that when we see a very strong iron ore price, and we believe that is worthwhile to lock into that price for risk management service, then the Board will still be believing that it is for the benefit of the company to hedge a certain amount. But that is a ore for strategic hedging strategy. And obviously, because of the movement in iron ore price as well as the movement in COGS from the hedging is very difficulty to guide about how much hedging we're going to do or how much hedging we are not going to do. So -- but the overall program is that -- so hopefully, I answered your question. And in terms of your second question about discount. Again, this is a commercial discussion -- a commercial point, which I think is a bit sensitive to discuss in this call. Because obviously, we don't want to give too much commercial script in this conference call, that will affect our business naturally. But I guess if you look at our achieved selling prices versus the flat 65% price, you get some idea of what the differences will be set.

Johnny, I can only add that in terms of the shipments, which we are doing on that sea route, we believe that we are trading on a level which is in line with the pricing, which are the majors like producers or like its really getting. Although on the basis of -- of course, looking at the difference, which Johnny mentioned a minute ago between the price where we are realizing and between the index, it seems that I think the difference is more than our peers are getting or trading at the port but the trick is that when we are trading on the basis of the shipments of railway, we are not burning the cost in relation with freight and also the cost of the reloading at the port. At the end of the day, the profitability, which we are getting all the supplies using the railways is better, but there is a certain date situation in terms of the market in the Northeast of China and in the area where the major producers of the steel allocated in the area with the ports, it's a difference is -- it's different and the difference it reflects the situation in the market, which we have to adhere to because we obviously -- we are -- with our volumes, we are not influencing the price on the market and we are the takers of the price. But in our view, the client mix, the geography mix, which we have at the moment is basically the best balance in terms of derisking our risks of logistics, our risk of marketing and intake in kind of making this decisions in which direction we are sending our products, we have to take into account other factors, including the congestions on the railways and the capacity of the border crossing. And yes, at the end of the day, it has to be the balance of the quantity we are producing and the sales we're achieving and kind of the margins and the realized price -- realized price on the cost. Unfortunately, we cannot give you the exact information because as Johnny mentioned, this is commercial.

I appreciate your answer. And to follow up on the railway, does it mean that due to the sanctions, it will be very difficult in the future to potentially sell any iron ore to Korean or Japanese customers rather than 100% to Chinese customers?

Sorry, can I clarify the question? What is the connection between the Japan and Korea with railroad?

Right. Because you said before, you actually use the railroad to sell to seaborne to Chinese customers further away, right, than the main Chinese customers that you have now. So I'm wondering why have you not previously tried to sell to Korean or Japanese customers which are of the same distance if they are also essentially by seaborne customers. Is there some historical fact? Or do you think that in the future, you will still sell 100% to Chinese customers?

We actually have sold some material to Korean company called with the name, Johnny can you remind me or Danila, what is our Korean client, the steel mill POSCO, right?

Yes, POSCO, right.

So to POSCO, we have done some shipments to Japan, but they were not very big. No, we don't see any restrictions with the selling through the delivery over the sea. We don't know what sanctions will be, what kind of sanctions will be imposed in the future. But currently, our logistics is not affected with the sanctions at all. Railroad is a operational, sea freight is going on. So right now, there is not any effect what will be in the future. Let's simply wait.

And next, we have a follow-up question from Peter with Wardhaven Capital.

Yes. You're forecasting a complete deleveraging over the next 5 years. And what I'm trying to get a sense of if you're generate -- you're generating hopefully, conservatively, something around $100 million a year, even allowing for a well-deserved dividend of $30 million to $50 million of shareholders, that's still going to leave a reasonable amount of free cash flow. What would be your priority for that money? Do you expect to bring a reasonable degree of leverage back into the business? And what is the approximate cost to increase the capacity to, I think, from -- towards the step one is to 4.6 million metric tonnes per annum?

Johnny, you understand the question about dividends once again, right?

Yes.

Partly, but also the cash in excess of any dividend paid, what are your capital budgeting priorities, do you really expect to run the business with 0 leverage? And can you give us some idea of what the cost to increase capacity to 4.6 million tonnes per annum would be?

Johnny.

Yes. Let me try to explain this. I think that's a very good question. I mean you have done your calculation. And indeed, we're looking at some positive cash flows this year because of a very strong iron core price, the current iron core price is quite strong, and we have some ruble depreciation as well. I think generally, we are looking at 3 areas which we are trying to focus our cash resources on. The first is Sutara development because that is crucial for us. Otherwise, there won't be enough feedstock to allow the project to go on. And Sutara is one and then reducing the gearing, i.e., repaying the debt is the other one because, obviously, even though our obligation to repay only $21 billion next year, but it's always like to reduce the gearing. Now as a side question -- as a side answer to your question, you ask whether we should be geared or totally ungeared at all. Now I think this is a very interesting question because from the history of IRC, we have never been ungeared before. But if you ask me -- so this is just a Board question, and the Board really to look at the cost funding as far as the cost of equity or things like that. So that will be a combination of factors that we need to consider. But if you ask me generally, I think it's perhaps justifiable to have a slightly geared company. But again, I think it's not too early to tell. Of course, we're still around $100 million of loans that we did repay. So a -- to recap, A, Sutara development, B, reduce gearing; and three, very importantly, dividends. The other thing is the Board is very, very eager to reward the shareholders through dividend. It has been long overdue, and we are actually meeting the promises that we made when we first listed in Hong Kong. And so -- but again, at this moment, I can't guide you about the level of payout. That I guess the thing is we also have to look at how the year 2022 goes in the second quarter or as far as the third quarter. But I can assure you that the Board is very eager to pay dividend, and that's why we are very, very much accelerating the capital reduction program to allow us to pay dividends.

And my last part of my question, the cost of increasing capacity.

Yes. Yury, let me try to...

It's Slide 26 of your presentation.

Yes, Johnny, please.

Yes. Yes, I think this is an interim operating plan that we discussed 2 years ago, I guess the thing is we have to walk before we run. Now by walking, what do I mean is that we have to get Sutara up and running first because Sutara we simply will not be having enough feedstock to support the increased production capacity. So I guess the quick answer to your question is that 4.6 million tonnes production plan, it's not going to materialize in the near future because we will be focusing on Sutara development first. And I guess, by that time, we will definitely be looking at other core possibilities of development.

[Operator Instructions] There are no further questions at this point in time. Kent?

[Foreign Language] Due to the time limitation, we are now ending the meeting here, and thank you, everyone, for joining us today. And we appreciate your time. If anyone has any questions, please feel free to contact us at any time on our website or contact information, www.ircgroup.com.hk. With that, thank you, and have a great day. Thank you.

Thanks.

Bye.

Thank you.