IRC Limited (1029) Earnings Call Transcript & Summary

Good afternoon, welcome to the conference call. Chairperson today is Kent. Kent, please begin your call, and I'll be standing by for the Q&A.

Thank you. Good afternoon, everyone. I would like to welcome all of you to IRC Limited 1029 Stock 2022 Second Quarter Trading Update Conference Call. With us today, we have our CFO, Mr. Danila Kotlyarov; and also our Finance Director and Company Secretary, Mr. Johnny Yuen. We regret that because our CEO, Denis, is currently traveling for business, and he is unable to participate in this call. And we hope that we -- he can join us next time. At this time, all participants are in a listen mode. There are Q&A section, which you can ask in English, Mandarin or Cantonese, will follow the formal presentation. As a reminder, this call is being recorded. Announcement and PowerPoint slides we'll be using for this call have been upload, and you can download the documents from our website, www.ircgroup.com.hk. [Foreign Language] It's now my pleasure to turn the call over to our CFO, Mr. Kotlyarov. Mr. Kotlyarov, please begin.

Thank you very much, Kent. Ladies and gentlemen, I welcome you to the IRC trading update of the quarter 2 of this year, where we are pleased to present you the results of the company over the quarter. So if you open the Slide 5. On this slide, you'll be able to see the highlights of the results of the company over the quarter. And we are pleased to give you an update that we have showed the record sales of the volumes, which was [ almost ] a 20% increase versus the previous quarter. We were able to achieve this on the back of the [ elevation ] of the issues with the logistics and the capacity of the railways, which we have experienced at the beginning of this year and also because of the increase of the sales volumes, we were able to increase also the volumes of the production quarter-on-quarter. We are glad to also to update you in terms of progress on the Sutara project, which is a major expansion project, which we are working on at the moment. And we are expecting we will be able to begin the mining operations at the Sutara [ field ] middle of next year with the first field of the award to the processing in second half of next year. A little bit update in terms of the liquidity. As you can see here, we were able to significantly increase the cash balance of the company, which basically doubled over the course of the quarter. This was on the back of the high level of the prices of the iron ore, obviously, and also because of the improvement in cash management and improvement in structure of the working capital of K&S. So although we would like to give you the heads up in terms of the recent changes in the micro, unfortunately, due to the slowdown of the Chinese economy and the slowdown in the demand on the steel, demand on an iron ore, the high levels of prices that we have been enjoying in the beginning of this year at this moment of time. So the level that we see in the market is much lower, which is representing a challenge, but I'll speak about this later on. Can you please move on to the next slide, where you'd be able to see more information about the performance of the K&S. As I mentioned already, we have showed significant -- I think it's a record volume of sales and the increase in the production quarter-on-quarter. Although I would like to explain the negative difference in terms of the volumes of the mining because of the issues with the supply of iron ore resulted out of the problems with logistics early in the year. In the first quarter of this year, we were able to accumulate significant additional volumes of the stockpiles of the ore and also the finished ore goods. In the second quarter of this year, we were increasingly utilizing the stockpiles of the ore. Hence, the volume of mining of the ore in the second quarter of this year are lower quarter-on-quarter. On the next slide, just a quick again update about the liquidity. I can just mention again that on the back of some improvements in the structure of the working capital of the company, we were able to accumulate a significant amount of cash. So that in the consequence, we have a significant decrease in the net debt of the company, which I think is also lowest in the history of the company. And in terms of the service and repayment of the loan, the total amount is USD 14 million, which were paid in accordance with the schedule. At this one time, I would like to pause and ask Johnny to provide you a quick update about the profit warning, which we are making.

Yes. Thank you, Danila. So if you turn to Page 10 of our presentation slide, you can see that we have issued a profit warning for the first half of 2022. Now obviously, last year 2021, we had a [indiscernible] phenomenal year, especially the first half of 2021, when the iron ore price was really, really strong. This year, 2022, iron ore price has been strong, but not as strong as last year. So on this basis, we are, as expected, making less profit than we did last year. So to recap, last year, in the first half of last year, we made USD 98 million profit. But this year, we are only expecting to make a profit of USD 30 million to USD 40 million. But I would like to reiterate that this is still a very respectable number, taking into account the fact that the operating [ form ] is now obviously worse than what we had last year. This drop in profit is mainly because of the weak [ final ] price as well as the very strong inflation across the world, especially in Russia as far as this increasing interest rate and all other operating parameters. We might lead to do an asset impairment, which we are still looking at because, obviously, in every obviously reporting period, we do have to review the recoverable amount of our assets to determine whether an asset impairment is required. But we have mixed such impairment, such impairment will only be low in cash and not recurring. But in any case, we will keep the Board -- sorry, we will keep the market updated for any development on this front. We shall issue our interim results by the end of August. So pretty soon, we will have full results. And by then that, we'll have another conference call to discuss the first half results with investors. So I would like to hand the call back to Danila, and I'm very happy to answer the questions you have in the Q&A session. So Danila, can you talk us through these challenges and opportunities of IRC?

Yes. Johnny. Yes, just a quick update again of what I mentioned already, but I believe that's important enough that we touch upon this again. So if you look at the Slide 12 and below. So I would like to mention again that what I mentioned, Johnny mentioned already is that over the course of last year, the company was enjoying the significant record high level on the price of iron ore. I believe that, in average, the high-grade iron ore price was about $190 a tonne. So in the first half of this year, it was also at a level of about $160 a tonne. But at this point of time, as we're talking, we are talking about the spot price is about $120 a tonne. So there is a significant -- we have seen significant softening of the price of an iron ore. And at this moment of time, we are looking at -- we also -- the shift in terms of the structure of the demand on the iron ore and steel -- and also steel in China because of the slow -- of the slowdown resulted with COVID, et cetera. And so as obviously, we are the producer of the one commodity. We are fully exposed with this. And this represents a challenge that we have to leave them and we have to adapt. But it's still, if we look at the history of the past years, yes, at least at this point of time, the process are still on a level which is strong enough. But in terms of the trend, we might be looking at a negative. And in terms of other challenge that if you look at the next slide. So we operate in Russia, and it means that the majority of the cost of K&S [indiscernible] renewables and hence, in the previous years, when the ruble have been constantly depreciating, that was -- it has a positive direct impact on the cost of K&S. But if you look at the graph, you can see here that the level of foreign exchange for this moment of time, it's unusually high. So it's RUB 60 a dollar. This is a level which we haven't seen over the past years. And it has -- if you look at the average net exchange rate of about 74, which we had last year, it represents basically 20% appreciation of the ruble against dollar. Yes. And it has a direct almost equal impact on the cost of the K&S because the majority of our costs are denominated in rubles. And on the next slide. As Johnny mentioned already, the whole world is living in high inflationary environment at the moment. And I guess Russia, obviously, is not an exclusion. And in addition, with the general inflation, we see the inflation of the spare parts, which are imported into Russia because of the problems with the logistics and with the sanctions. And all this are putting pressure on the cost of K&S. And this is one of the major challenges the company is facing at the moment, but I guess all other companies in sector are facing the same issues right now. So although it is a part of the challenges, we have a number of opportunities, and I would like to quickly update on them again. On -- yes, one of them is the, as we mentioned already, is the development of the Sutara Project. Yes, Sutara project is basically the expansion of K&S. It allows us to significantly increase the life of mine of the K&S. And although we're also expecting that with the high grade of the magnetic iron in the -- in ore of Sutara, it will allow us also to improve the yields and increase the production volume of K&S, which should also be one of the [indiscernible] connections in terms of the [ accumulation ] of the cost of production. And obviously, we talked a lot about the bridge in the past. But so basically, bridge is complete. And we are expecting that the full operations and K&S ability to using the bridge will appear in the future. And with the bridge in place, we believe that the problems that K&S was experiencing in the past in terms of the capacity of the railways, it completely will be alleviated. And also, as a promise in the past, it shall give us the optimization in terms of the cost of the transport. And it's also one of the -- it's one of the opportunities and one of the mitigating actions that we have in terms of tackling the issue of the inflationary environment. I think that's mainly all in the last slide here. Just information about our Board. As you know, we have a new Board that was approved on the AGM on the general in the year. Yes, the Board is quite experienced. And at this point of time, the Board is in the process of doing a strategic review of the business and also and looking at opportunities. And on the best way to use the opportunities that we have in our competitive advantages. And I can -- you can make a note here that the improvements in terms of the logistics and our ability to increase the capacity, it's also been achieved with the direct involvement of the Board. So I think that's all, and now we can move to Q&A.

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

Gentlemen, first of all, congratulations on the performance. I guess it was quite a difficult operating environment. My question relates to the equity consolidation that was originally muted. And I'm just trying to get an understanding of why you decided to delay that and what your thought process was.

Johnny, will you answer this? I guess we are talking about the capital reduction, which we announced earlier.

Yes, that's correct.

Johnny will answer that.

Yes. Peter, I think at this moment, the Board is now reviewing doing the strategy of the company. Obviously, the viewpoint was formed at the end of May. And so it will take a bit of time to see where we are in terms of the strategic point of view. And so that process is ongoing. And also, I think we do have to take into account the fact that the current operating [ permits ] are not really that favorable. Obviously, we have a much lower iron ore price, increase is very high as far as it's a very strong ruble. And these are all not very helpful to our bottom line. And so at this moment, the focus has been on still reported parameters. But having said that, if you look at our operating -- our operation by itself, I think we are doing reasonably well. Obviously, sales goes up by 20%, production went up by 13%. So it's a parallel progress. So while we are looking into this treasury review, we will come into that decision. But at this moment, the Board would like to focus on the strategic review as well as dealing with these external factors.

Our next question comes from [ Mr. Lau Hiking ].

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Our next question comes from James.

I have 2 questions, please. The first one is regarding Sutara. Can you give us an update in terms of what is the additional capital expenditure required to get Sutara up and running by second half next year with the current ruble and construction cost. First question.

Yes, I can answer this. So in terms of the guidance that we provided, I believe, end of last year about what [indiscernible] USD 5 million. That remains our outlook in terms of the completion of Sutara project. We will -- we cannot give you the up-to-date amount of the CapEx, but it will be in our report -- in our interim report that we're publishing at the end of the month. So you'll be able to see the number in the report. Although by the end of last year, I think the total amount of CapEx spend on Sutara was about maybe USD 10 million. So the majority of the CapEx are planned at the end of the -- in the first half of next year. And so our guidance remains unchanged at this moment of time in terms of the total amount. There was no any significant changes in terms of our assessment if you ask about this.

I see. And when you say second half of -- when you say Sutara is starting second half of next year, is that it will reach full production by the second half of next year? Or it's going to start production by the second half of next year? What's the ramp-up period?

Yes, let me explain. Sutara project is not the new project. We are not talking about -- this is basically the expansion of the mining. So with the Kimkan mine, which is we basically in the process of depletion. So it's gradually the amount of the work that we are mining at the Kimkan piece is gradually, we will be declining. And Sutara Open Pit will be ramping up and will be replacing the Kimkan ore, and although this process will take a few years. So it means that we don't need Sutara to be up and running with a full scope of capacity was basically 10 million run of mine per year. We don't need it like to be -- we don't need this to be on day 1. This will take a few years, and this is in line with the original plan of the Sutara development. So the gradual increase of the capacity of mining in Sutara completion is completely in line with our plan of development. And the purpose of this is just to gradually replacing the feed of the ore of Kimkan. So the current estimation in terms of the timing of Sutara, it works okay, and it allows us to mine and feed the required amount of the ore to the plant, which is approximately 10 million of the tonnes for the year.

I see. Second question is regarding your debt repayment. You have USD 106 million in debt. So the question is, do you have any plans similar to last year where you had an early repayment of the principal of those debt?

Good question. Yes, happy to answer. Yes, obviously, we have accumulated significant amount of cash. That's why the face amount of debt is about USD 100 million. The net debt mid of this year is much lower because the majority are sitting in cash. But as Johnny also mentioned already. At this moment of time, with the new Board in place and with all the recent like challenges that we are facing at the moment with a significant decrease in the price and significant depreciation and the constant increase in the cost, we are -- we need to be careful in terms of managing our liquidity. So at this moment of time, we are looking what is the best way of -- in terms of allocating the cash between the capital requirements, which is Sutara project between -- and also between repayment of the debt. And so yes, I think, yes, over the course of the second half of this year, we'll analyze this and make -- we'll form the view whether we shall do the -- we shall do the prepayment of the loan, partial prepayment, or we shall keep on going with the scheduled repayment.

In other words, can you repay the loan early at any time of your choosing? And are there no penalties regarding that?

We can. There is a part of the loan, which we paid last year, as you know, without penalty because this is a bullet repayment loan. It has no [indiscernible] balances. In terms of the main portion of the loan, we have the penalties, but I believe they are minimal. And in many cases, there's no -- we don't have any risk restrictions in terms of our ability to repay. So answering your question shortly, yes, we can repay.

[Operator Instructions] Our next question comes from [ Jan Fung ].

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That's all for the questions we have. I will pass the line to Kent.

Okay. [Foreign Language] Thank you for everyone for joining the call today. So we appreciate your time. If anyone has any questions, please feel free to contact us at any time, contact either and refer to our company website, www.ircgroup.com.hk. Thank you, and have a great day. Bye-bye.

Thank you very much. Bye-bye.

Bye.

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