IRC Limited (1029) Earnings Call Transcript & Summary

Good afternoon, good morning, ladies and gentlemen. Welcome to the IRC Conference Call. Kent, please begin. I'll be standing by. Thank you.

Thank you. Good afternoon, everyone. I would like to welcome all of you to IRC Limited, 1029, Hong Kong, to First Quarter Trading Update Conference Call. So with us today, we have our CEO, Mr. Yury Makarov; Deputy CEO, Mr. Danila Kotlyarov; and also our CFO and Company Secretary, Mr. Johnny Yuen. [Operator Instructions] So as a reminder, this conference is being recorded. Announcement and PowerPoint slide will be -- is upload already in our website. [Foreign Language] So it's now my pleasure to turn the call over to our CEO, Mr. Makarov. Mr. Makarov, you may begin.

Thank you. We will as on this moment, I will pass through the operational figures, and my colleague, Johnny Yuen will follow with the financial details. During this quarter, we have increased the sales of our product. We are exploring new customers, and it helps us to develop new shipping roads to avoid the logistics issues. Our project of Sutara is on track. It will be commissioned later this year or early next year. Our production was marginally lower, and it's because of the shipments and all quality constraints. We believe that this will be avoided next quarter. Our cash balance is around $39 million. Johnny will give you more details about it. Iron ore price is at good levels, not as good as it was last year, but still it's increasing, and we believe that during the extraction season, this situation will -- developed. Our main operational currency inside Russia, Russian ruble is a bit depreciated, which also helps us. There are some sanctions imposed to the country, but they are not affected our operations anyhow until now. We believe that in future, will also not -- will not have any material impact on us. We are working with Russian authorities to finally fix all the paperwork, which should allow us to operate without any issues. Johnny will also lead you through the process of capital reduction which we need to consider the possibility to pay some dividends. If you will move to the Slide #7, you will see that, as I mentioned, our production is 1.5% lower, but sales higher than previous quarter. We are mining at a bit lower grades now. So we are receiving less concentrate, which is also influenced by some issues with the performance of the contractors. But we believe that they will improve their operations performance and this will help us to return to the normal level of the production. Once again, as I mentioned, we have some railway shipment restrictions, which also we believe will be less influence to our operations over the period of year. Talking about the drying unit, which was a problem last year, last couple of years, because of the problems we inherit from our main subcontractor. This unit over this winter was operating perfectly. There were no any problems with it as well as with other equipment. So apart from the usual maintenance, there were no big interruptions in the process. We are preparing Sutara deposit, which is the development of our resource base, and we believe that we will be able to start mining them by the end of this year or early next year. Design and construction is going on there. We are building electricity line, building railroad, also building outer road and we have almost completed the diversion channel of the River Sutara itself. I think that each -- for now -- I will maybe add a few words later, but now I would like to turn to Johnny to lead us through the financial figures. Please, Johnny.

Thank you, Yury. If you turn to Page 9 of our business in the slide, you can show -- you can see our financial resources as well as our liquidity position. Our cash balance at quarter end was USD 39 billion. Obviously, if you look at our last quarter, the last year-end, we were having a cash of $52 million. Now, the decrease is mainly because of the timing of the cash flow. We had a quite aggressive cash management at the year-end last year, just to make sure that we have as much as cash at the end as possible. And so it's all some kind of working capital movements during this first quarter, leading to a slight decrease in the cash balance. Obviously we also need to pay for the debt due to MIC. So altogether, we pay around USD 7 billion to MIC, which is now a principal lender, reducing our debt owing to them to USD 108 million. Our net debt is still remaining at a very low level, which is USD 69 billion. The chart in the slide is a very interesting slide. It just shows that how much cash -- how much debt we have repaid during these 2 years. So we now have a significant improvement in the gearing of the company. And the right-hand side in the slide shows the loan repayment profile. As you can see, basically this year we need to pay $20 million of loan to MIC. That is a relatively easy repayment schedule. So I think we have a much easier loan to handle, which will help the company's plan to position. So basically, this is the quick snapshot of the financial resources of the company. I'm happy to answer any questions that you may have in the Q&A section. But for the time being, I'll hand the call back to Yury who will talk about the advantages of IRC as well as some of the latest developments in the bridge and sanctions. Yury?

Yes, Johnny. Thanks. As usual, we are paying attention to our advantages. One of the biggest one now is around 65% iron ore price now. As I mentioned, once again, the -- we have decreased capacity a little bit comparing to the previous quarter, but still we are producing more than 2.5 million tons of iron ore, and the price -- sorry, of iron concentrate, and the price of this product is increasing. Talking about logistics, once again, I should repeat that we have some restrictions with railroad, but we believe that they will be bypassed when the new bridge connected Russia and China will be finalized. It was officially opened yesterday. And although it will take some time to finally make all paperwork and commodities available with operations, we will -- we expect that within the next couple of months, it should be operational. Russian ruble is very important part of our cost in the ruble-to-dollar exchange rate. And this quarter, it was also depreciated 15%. Turning over to the -- lead us through the debt -- and debt ratio. And maybe you can give us a few words about the labor there, Johnny.

Sure, Yury. Slide 16 shows the movement in LIBOR over the past 3 years. As you all know, our LIBOR recently is slowly creeping up, but it's still at very low level. Today, it's around 1%. It was [indiscernible] 3 years ago. So it's still at a relatively low level. That is nice. The other thing is, as I mentioned, I think if you look at our loan principal balance, in 2019, when we just refinanced the loan, our loan balance is somewhere around $225 million, but now it's all the way down to $108 million. So all in all, I think we are still looking at a very healthy financial position in the sense that, even though LIBOR is likely going higher, it's still in a relative low level, and also the fact that we have significantly reduced our debt principal. I think on the case perhaps it's that, the loan is no longer -- we don't need to pay any guarantee fee for the loan. And so that saves another 3% of guarantee fee. So all in all, I think we are in a much better position than we did a few years ago. Yury?

Right. One of the very important questions which our investors are asking us quite frequently, it's the influence of the sanctions against Russia. We should admit that up to now these have not influenced us materially. We are not dealing with sanctioned companies. But in future, we believe that we probably will be faced with some supply chain disruptions. There are some issues with the mining equipment now because many producers are down from the market. But as we get information from their local dealers, they are -- they will supply spare parts, and they some -- exploring some possibilities to do it through different other markets. As usual, we are putting our map of operations on to the presentation. You can find it on Slide 21. I think that's it up to now, and we probably can move to the Q&A session.

[Operator Instructions] Our first question comes from Peter Heber Percy.

Well done on the performance, gentlemen. I have 2 questions. The first is, was operating cash flow comparable in the first quarter to the last quarter last year. And the second question is, you indicated you've been a beneficiary of ruble weakness, but you then further in the report suggest that you expect right cash cost to continue to rise. Could you give a bit more color around that? And what do you think will happen to cash costs when Sutara is operating next year?

Johnny, I think it's...

Yes. Let me handle it. Thanks, Peter. So the first question is about operating cash flow, if I understand correctly. Now because this is only a quarterly trading update, so we don't disclose the full cash flow statement in the trading update. But if you look at -- obviously, we have put out our annual results last month, which set out the full cash flow statement of the year. And the next cash flow statement will be put out in the interim result announcement due in August. I guess your principal question is relating to the reason why we have a decrease in our cash balance in this quarter end. Now I think if you look at the [indiscernible] cash at the year-end last year, 2021, we actually were exercising quite aggressive cash management approach where sort of like we tried to get as much receivable as possible, while we tried to delay the payment just to have some lever and some cash for the year-end. And so this year, obviously, payroll becomes payable. We still have to settle that. And so this has come kind of like a normal working capital movement. And so we are looking at some timing differences in the cash flow. So I think $39 million cash balance is still a very healthy cash balance that we have. So hopefully, I've answered first question, or Peter or -- anything you want me to add to that first question?

No, that's fine. Just trying to get a sense of whether -- I mean I know you can't give any granularity, but whether generally speaking, operating cash flow was comparable to last quarter last year?

Yes. And your second question is about ruble, the cash cost. Again, obviously a quarterly trading update, we don't do detailed analysis of the cash costs. But as we have previously guided, I think the thing is obviously ruble is depreciating, or was depreciated to a low level in the first quarter, but it's now kind of like back to 70 something today. And -- so it was helpful in the quarter 1, but it wasn't that much at this particular moment. While I have said that, obviously we have to do the inflation in Russia, which is slowly growing. As far as the fact that the mining contractors are also trying to get -- increase the mining rate and we are increasing mineral extraction tax or things like that. So -- and obviously we are selling more to the seaborne customers, which has a higher transportation cost. Now I need to reiterate that, yes, it has a high transportation cost, but it also has a higher selling price when comparing with the [indiscernible] customers. So I think, again, that is the main reason why you are seeing an increase in cash cost.

And the impact -- once Sutara is operating, what is the likely impact on cash costs, assuming all other things remain the same?

Well, I think initially, obviously we need to -- and as I always say, you need to crawl before you walk and need to walk before you run. So initially, when we have to start mining at Sutara, we won't be able to see immediate results. But when Sutara becomes fully operational, then we will be seeing a better or more efficient cash cost.

[Operator Instructions] [ Dominik ], Please go ahead with your question.

I have a couple of questions about your major shareholder and whether there were plans for Mr. Levitskii to actually join the Board.

He has already joined the Board.

He's already on the Board, is he?

He is on the Board, yes.

Okay. That's good. And on the same token, the company MIC, who seemed to have the loan, can you tell us a little bit about this [indiscernible] took over?

Sorry, once again. About what? I haven't heard the last part of your question.

It's to do with the company MIC. We've seen that to be in control of the loan. And you mentioned in your release that the loans -- how do you control -- one is Marina Kolesnikova. I was just wondering if you could give us a little bit of color as to who she is.

We have no ideas. It was an idea of our bank, of GPB to pass this loan to this company, and we simply were faced with this fact.

Okay. Well, we'll leave that for now. The final question, just on the capital reduction exercise. Can you give us a bit of a timetable on when shareholders will get to vote? And is that going to be in the current quarter? And might there be the possibility of an interim dividend, all things being equal on that basis?

Johnny, please?

Yes. Very good question. What we are planning to do is to -- obviously as you rightly pointed out, a capital reduction exercise will need shareholders' approval. So we -- what we are proposing to do is to include a resolution for the shareholders to vote in the upcoming AGM in June. And then -- so obviously, hopefully, we're sure that it will be approved and fingers crossed, that will be beneficial to all shareholders. In terms of interim dividends, obviously we'll have to see how things go at that time. But I wish to reiterate that the Board has always been wanting to reward the shareholders. But obviously we'll decide at that time, but it's always intensive support to pay out the dividend.

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

Yes. Thank you. Okay. [Foreign Language]. So thanks for your questions, and 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 in the future, please feel free to contact us at any time. Contact details, you can refer to our corporate website, www.ircgroup.com.hk. So with that, thank you, and have a great day. Bye-bye.

Thank you. Bye.

Bye.