IRC Limited (1029) Earnings Call Transcript & Summary

Good morning, good afternoon, ladies and gentlemen. Welcome to the conference call. Kent please speak and I will be standing by. Thank you.

Thank you. Good afternoon, everyone, and I would like to welcome all of you to IRC Limited 1029, 2022 Interim Results Conference Call. So with us today, we have our CEO, Mr. Denis Cherednichenko and also our CFO, Mr. Danila Kotlyarov and our Finance Director and Company Secretary, Mr. Cheong Yuen. At this moment, all participants are in listen-only mode. A brief Q&A section, which you can ask in English, Mandarin or Cantonese, will follow the formal presentation. As a reminder, this conference is being recorded. Announcement and a PowerPoint slides, we'll be using for this call has been uploaded, 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 CEO, Mr. Cherednichenko. Mr. Cherednichenko, you may start now.

Good afternoon, dear shareholders. Good afternoon our investors. My name is Denis Cherednichenko. I'm newly appointed CEO and Executive Director of IRC. It is my great honor to present you with the interim results of our company for the first time. During the first half of 2022, operation-wise, we performed well in the face of various operating difficulties. However, over these recent months, the macro operation environment has seen a great volatility. So our H1 2022 highlights. So the decrease in iron ore prices resulted of -- resulted in 23.7% drop in revenue to $165.7 million -- so -- and that is why so EBITDA, including nonrecurring items and foreign exchange decreased to $52.4 million. And there is also our underlying profit of $39.2 million, nevertheless, of all these circumstances. And also, we achieved a reduction in our net debt to $26 million. And by this, we have quite good result in net debt to EBITDA. It was reduced to 0.26. Loss attributable to shareholders of $77.9 million, mainly due to noncash impairment, and we increased our cash and deposits to $76.9 million in comparison with the end of the previous year, $52.1 million. Sales volume amounted to 1,277,000 tonnes, despite railway congestion issues affecting shipments. So we'll tell about this in detail later. And also production volume is in line with sales volume and comparable to the last year. Sutara, our main developments -- also Sutara development gathering pace, progress on track to start operation in second half of 2023. So we will tell about this in details later. So we are optimistic about the long-term prospect in iron ore industry nevertheless of circumstances. So we believe that IRC will need to endure some difficulties in the nearest future. To meet the challenge, we have significantly refreshed the composition of the board to ensure we have an appropriate mix of skills, experience and diversity to suit the evolving nature of the business and social expectation. I would like to pass the word to our CFO, Danila Kotlyarov, to tell you details about our financials. Danila, please.

Thank you very much, Denis. Ladies and gentlemen, if you can yes, if you can look at the next slide where we have the review of our results. Denis mentioned already about the major factors that been influenced in the results of our company. So we have seen the decrease in the revenues, although that was mostly -- it was mostly the result of the significant decrease in the price of iron ore, which last year was on a record high level. So this first half of the year on the back of some decrease in slow down in the Chinese economy, we have seen the decline in demand and also in the price of iron ore, and that was the major factor, which influenced -- which has influenced the results of the company. So in terms of other numbers, I think that had a little bit of performance of the company over the first half of this year was good. So we generated quite a lot cash. And as a result of this, we have the lowest in the history of the company in the level -- the level of the debt. On the next Slide 8, there's a little bit more information and some explanation about the key drivers of the performance of the company. So I just wanted to mention again to what was at the beginning is that the major drive of the negative result of the company was the write-off of the asset project [ K&S ] on the back of the number of the access, which we mentioned already primarily, this is a drop in the price of iron ore. It's a general expectation of the inflation increase in the cost, which is what we are seeing worldwide everywhere. And also, there was an adjustment in terms of the assessment of the lack of the company, especially in terms of the cost of equity and the risk premium associated with the Russian economy. So the results of this and in accordance with the accounting roles, which we are using, we were required to do the impairment. Although I would like to underline again, this is noncash impairment and if the -- if in the future, the parameters or the macro parameters and especially the parameters in relation with the iron ore market improve, we'll be able to make reversal of like we did in the past. On the next slide, the information about the cost of the company, and I think it is important to underline here that overall we had an increase in the cost, but I think that primarily a reason of the increase in the production -- most of the company, and you can see here over the first half of last year, our cash cost on date of the mine was around $42 a tonne. So this year is $48. So the increase is moderate and if you can look at our analytics like it's mainly in line with the pace of the inflation in Russia. So we are affected like everybody else in the economy with the increase in the prices. And if you -- in terms of contribution this, we can mention also that there was an increase in the taxation in Russia, especially in relation with the coal miners and iron ore. The base calculation of the tax on the natural resources was changed and basically result in a significant increase in the mineral extraction tax we are paying. But at this moment of time, there is also discussions in Russia about changing again of the base of calculation and which potentially can result in the decrease of the tax. So we are optimistically looking at the possibility, decreasing the cost in this regard. So in terms of the increase in transport is basically the reflection of the change of the client mix of the company. So in the previous year, the majority of our product were shipped using railway. In the first half of this year, we had [ samples ] of the product that we ship are using the sea route. And it means that on top of the railway, we had also freight costs in the total cost of transport. So on the next slide, you see some information about the balance sheet of the company. In terms of the changes, I can mention again that in terms of the PP&E amount, this is purely the impact of the impairment. So and probably the -- it's worth explaining in terms of the increase in the receivables. The reason of the increase was a temporary like delay in some of the payments, which company was obtained in the middle of the year. So it was mentioned here that the reason of this was the sanctions. It's not because -- it's not really the big issue, it was like indirect -- it was indirect impact of the sanctions in a way that in terms of the compliance number of time, which banks are taken at the moment in order to process the payment has increased and directly with effect that -- it affects a little bit of timing of [ baskets ] in the -- of sales by getting out to our customers. But we are dealing with this and believe that in the future, this problem will be alleviated. So in terms so far of other items, I believe there is no any significant changes which require explanation. So on Slide 11, there is information about the cash flows of the company. Again, I guess part of what I explained already, there is no big changes, which worth explaining. So it's why clearly that generally the EBIT, which company is generating. It is reflected in the cash flow we are getting. And as a result of this, we have quite significant increase of the balance of the cash flow, which is quite positive and yes, usefully had ahead of the difficulties like times, which we are looking at the moment with all inflationary environment and also with the softening of the iron ore prices. Next slide, you see the information about, again, about the liquidity net debt of the company and also the amount of indebtedness and the schedule of the repayment, there is no changes from our previous announcement. So I can only mention again that in terms of the leverage, I get the number which you see here, which is -- which is 0.3 is the lowest level of leverage in the history of the company, which is particularly good again in light of the difficulties, which industry is faces at the moment and our company as well. On the next slide, it's a bit of information about the hedging of the iron ore & FX because there were -- we had lots of questions about this in the past. So I can only mention that in accordance with the approach which company has used in the past in terms of hedging of an iron ore and in light of the volatility of the iron ore prices last year management used -- entered into the hedging using the auctions. And with decrease in iron ore prices. This contract resulted in no gains in H1 of this year. But as the mid of this year, there was no more contracts in relation of hedging in iron ore. So basically, in terms of the iron ore exposure we are unhedged at the moment, which may be positive because if you look at the results of the company over the last year, there was quite a significant loss on hedging of iron ore last year. So this year, we have no any losses of hedging of iron ore. In terms of the hedging of ruble, as you can see here, we still have a little bit of hedging in the ruble and in light of the significant depreciation of the ruble, it resulted in the gain of USD 2 million in the first half of this year. And the -- there will be no changes in exchange rate of the rubles, then we can expect like in the second half of the year, there will be increase in terms of the gains we are getting, which is good because we are suffering of the depreciation of the ruble, of course, as you know, we operate in Russian environment and it means that we are operating in ruble environment, the majority of our cost denominated in ruble. So in light of the significant depreciation of the ruble our cost increase, but we have at least a positive amount of the gain, which allows us to at least to compensate the parts of this negative effect. So I think this is mainly in terms of the financials in the first half of this year and I am handing over the call to Denis again.

So Denis, we will go ahead for the challenge and opportunity.

Denis, please go ahead.

So thank you, Danila . So I would like to tell you about the challenges beyond our control. So please look at the Slide 15 and the next slide, challenge #1, so volatility of iron ore prices. So Danila already mentioned. So in general, so all these challenges. So you can see the volatility of iron ore prices are very high. So right now also due to the impact of COVID-19 on the China's domestic demand is the leading cost of the declining of iron ore prices. And that is why so plus 65% iron ore prices fluctuating significantly. At the time, so the level is around [ USD 112 ] per tonne level. It is about 40% lower than average price in 2021. So -- and the commodity prices increased iron ore may remain weak and it is depressing global economic outlook and particularly China remains it's zero-virus policy [ intake ]. And due to that so our customers are also demanding for the greater sales discount. But nevertheless, so we try to keep our activity and try to discuss and negotiate with the best conditions. The next challenge is already Danila said, the depreciation of the Russian ruble. Russian ruble has had the best year-to-date performance of any currency in the world. Due to all these current circumstances, it's starting the reversal of the currency occurred in the second quarter of 2022, hitting a point of RUB 51 per USD 1 as a result of Russia's active measures to prevent the money flowing out of the country, sharp decrease in import and hence the demand for the foreign currency and sharp increase in fossil fuel prices. And however, for us, it's not very good. The strengthening of the Russian ruble has a negative impact on the group's operating margin is because our operating expenses are primarily denominated in Russian rubles, but our revenue is in U.S. dollars. And right now, so it's getting better, and we expect that maybe in the next -- at the end of the year. So also the ruble will be more stable. The next challenge is again connected to all of these is rising inflation. And of course, it has an impact on our operation cost. While some analysts forecast that the global inflation rate would rise to 7.5% by the end of 2022, driven by food, fuel, energy and supply chain disruption. Inflation in Russia is even more dramatic. Since the beginning of the year, Russia's inflation rate has increased significantly from a single to double digit from about 8% to 16%. And as again, I said that the group's operating costs are mostly denominated in rubles, we're affected by the strong inflation. So -- but anyway, we will adopt a cautious approach in management of the group liquidity to cope with the future uncertainties. But also, we have main 2 opportunities. First of all, so our -- we prioritize our opportunities 2 main aces, it's our Sutara project. So we continue our CapEx for Sutara and we expect our aim of protecting ore from Sutara by second half of 2023. We already spent around $15 million or around $35 million to be spent with a grand total is about $50 million. So the main -- our CapEx was to design, survey and deforestation of the field. And also, the main is crushing and screening unit, of course, differently. And of course, so we need to built bypass over federal road. Why Sutara is so important for us? Sutara's iron ore has higher ferromagnetic grade, it will help us to improve the production capacity, and also Sutara will be the long-term solution to improve the production capacity issue. So it is expected that over 30 years, so we will get this beneficiation properties. The next opportunit is Amur River Bridge. As we mentioned earlier, our Kimkan and Sutara project has been experiencing railway congestion issues for shipments to China. And this is affecting both sales and production for us. This Amur River Bridge being the first Russian-Chinese railway bridge over the Amur River will be the long-term solution to this transportation problem. The bridge site is approximately 240 kilometers from our mine and 180 kilometers from our nearest Chinese customers. IRC as well as its customers will benefit from this project with the reduced transportation distance shipment time. By employing this railway bridge the transit time to customers in China will be a reduction from 3-5 days to 1-3 days. And also, we expect that the cost for transportation will decrease as well. Construction of the bridge has been completed. Technically, it is ready to be used and it is expected to be commissioned later this year. So hopes to the Russia and Chinese partners, so they will open it very soon. And definitely, it will encourage Russian economic activities. And definitely, we will be maybe one of the best beneficiaries of this project. So in general, so we are optimistic about our long-term prospects on the iron ore industry, where we believe that IRC will need to endure some difficult times in the nearest future. So due to the circumstances beyond our control. Thank you so much. So on the next slide, you can see also the corporate information. So about our Board, but we told you about that before. So thank you for your attention. So I think that we can continue with Q&A.

[Operator Instructions] And it seems to me no question at this point in time, so would you like to wrap up?

[Foreign Language] Due to there is no more question at this moment. So we're now ending the meeting here. And thank you, everyone, for joining the call today. We appreciate your time. If you have any questions in the future, 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. Bye-bye.