IRC Limited (1029) Earnings Call Transcript & Summary

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

That's great. Thank you. Good afternoon, everyone. I'm Johnny Yuen, I'm the Finance Director and Company Secretary of IRC. I would like to welcome all of you to IRC 2022 First Quarter Trade Update Conference Call. Apart from me, with us today are our CEO, Mr. Denis Cherednichenko; and our CFO, Danila Kotlyarov. [Operator Instructions] As a reminder, this conference is being recorded. Announcement and PowerPoint slides for you in this call has been uploaded through our website, and you can download them from our website, www.ircgroup.com.hk. [Foreign Language] It's now my pleasure to turn the call over to our CEO, Denis Cherednichenko. Denis, you may begin.

Hello, everybody. It is good that they can present the Q3 highlights. The Board of Directors of IRC together with me, so and our top management is pleased to provide the third quarter trade update for the 3 months ended September 30, 2022. So if we talk about the highlights of quarter 3. So 3.9% increase in production volume over the previous quarter, 6.9% decrease in sales volume, mainly due to the Russia cross-border railway congestion. And also the continuous preparation of the Sutara deposit, with the aim of processing Sutara ore by the second half of 2023. Corporate & Industry highlights. The cash balance reduced to $46 million. Net debt increased to $51.7 million due to the working capital movements, weak iron ore price and heightened operating costs resulted from the strong Russian ruble, and we will talk about this in details later. The group's principal lender, MIC Invest Limited, agreed to subscribe approximately 1.4 billion IRC shares and a total consideration of approximately $19 million, reducing the group's gearing and strengthening IRC balance sheet; subscription completed in October 2022. China's COVID-19 measures and a slowing real estate market weakened the Chinese iron ore market. The Platts 65% average price declined 28% quarter-to-quarter, $116 per tonne. And of course, the Russian ruble stabilized at the average of RUB 59 per US dollar after seeing a sharp appreciation in quarter 2 2022. So the next is in Kimkan-Sutara operations, production and sales in quarter 3 and 9 months of 2022. During the third quarter, the persistent of cross-border railway congestion continued to affect our shipment. K&S's mitigating measure of diversifying sales to the local and seaborne markets, was not economical and had been scaled down, as the low iron ore market price environment made K&S unable to offset the effect of higher freight costs and stronger ruble currency. Despite the logistic constraints, the mine still managed to ship 649,100 tonnes of iron ore concentrate to its customers, representing about 82% of K&S's designed production capacity. K&S maintained a solid pace and produced 691,000 tonnes of high-grade iron ore concentrate, up 3.9% from Q2 2022. K&S's average production rate during the third quarter was 87% of its designed capacity. So again, we still actively preparing Sutara deposit for operation with an aim of processing ore from Sutara by second half of 2023. Increase in mining volume helps increase the mining works fronts and improve the access to the ore, which can stabilize the ore feed quality and optimize the performance of K&S processing plant. We have been facing a variety of hurdles and the third quarter of 2022 had been a tough period: Iron ore prices remained low, inflation and energy prices were high, and the Russian ruble was appreciating. K&S also been facing a number of operating challenges, most notably persistent railway congestion affecting shipments, as I said already. Despite the difficulties, I am impressed by the resilience and commitments of the IRC workforce, allowing K&S to improve its production volume amid the current operating environment. So -- and right now, so I want to pass the word to our CFO, Danila Kotlyarov.

Thank you very much. Denis, I will just quickly say a few words about the liquidity of the company. So you have a snapshot of the liquidity at the end of the last quarter, you can see on Slide 9. As Denis already mentioned, quarter-on-quarter, we have a decrease in the cash balance of the company and the amount of approximately USD 28 million. The difference, as Denis mentioned already, is mainly explained by the amount used for repayment or service of the debt. It was also the payment of the capital expenditures, which is mainly related to the development of Sutara projects, and also the changes in the working capital. At the end of the H1, we had some changes in the working capital, and some of this was kind of reversed in the last quarter. And we also have seen an increase in the balance receivables at the end of the last quarter, which explains also the decrease in the cash. But we are seeing the positive changes in these figures at this moment of time. I also would like to mention on the next slide, the results of the equity issue, which we announced -- which were announced in September. As you're probably aware, the transaction with the subscription of the MIC, which is our lender, was successfully completed mid of October, which allowed the company to raise approximately or USD 90 million. And you can see on this slide, proceeds were applied into the repayment of the debt. And as you can see on the graph here, this amount were applied to repayment of the last payment of the principal in this year-end, in amount of approximately USD 5 million and USD 10 million next year, and then USD 2.8 million the year after, approximately USD 1.5 million in the year after that. So as a result of this, the liquidity of the company should improve over the period until the end of this year, next year. And the amount of roughly of [ USD 50 million ], which is quite important in a situation where we are now with a challenging market environments. And this alleviation of the repayment schedule of our debt that helps us in terms of managing liquidity of the company. So in terms of the liquidity of debt, that's the only update we will plan to do in this call. And I'm handing back to Denis to talk about challenges and opportunities which we are facing at the moment.

Thank you. Thank you, Danila. So I would like to tell about several challenges beyond our control. First of all, as I already said, is the iron ore prices are volatile. The next is that the ruble appreciation increases K&S operating costs. And the third one is the rising inflation that has an impact on operating cost. So about the prices, iron ore prices are volatile. And as you can see on our table on our slide, right now so the price is extremely low. It is $91 as per November 3. The third quarter of 2022 saw a decrease in the market demand for the iron ore related to slowdown in steel production. The COVID-19 lockdown and the slowing Chinese real estate market cost, the Chinese iron ore market to weaken. But this trend persisted throughout the third quarter. Due to a beaker forecast for economic growth and high energy prices, demand for iron ore also declined in other regions, such as the U.S. and Europe. When comparing to the same period last year, the Platts 65% average price declined 89.3% in the third quarter and was 28% lower than quarter 2 2022; settling at the USD 109 per tonne level on 30th of September 2022. On a quarterly basis, the average price spread between the 65% and 62% iron ore indexes decreased by 47.8% from USD 23 per tonne in the quarter 2, 2022 to USD 12 per tonne in the third quarter of 2022. The selling price of K&S product is determined with the reference to the international Platts iron ore price indices. The achieved selling price of K&S in the third quarter of 2022 is not published in this trading update for commercial reasons. The relevant information will be analyzed and disclosed in the 2022 annual results announcement. The next challenge is ruble appreciation, the increased K&S operating cost. The Russian ruble is one of the most volatile currencies in 2022 so far. While the currency depreciated to about RUB 120 per USD at one point in the first quarter of 2022, it appreciated drastically in the second quarter and stabilized at an average of RUB 59 per USD in the third quarter. The movement of the currency is influenced by the factors, including the growth in fossil-fuels price, high interest rates and geopolitical concerns. The next challenge is the rising inflation that had an impact on operating cost of Kimkan and Sutara. Inflation is a key concern among the Russian businesses. Russian inflationary has increased dramatically to double-digits since the end of the first quarter of 2022. The average inflation rate in the third quarter of 2022 was 14.4%, up 7.5% from the same period last year. Inflation is worsening largely as a consequence of geopolitical issues and rising energy prices. Inflation has a negative impact on K&S's operational costs as most of these costs are paid in Russian ruble. So the next, I want to talk about the opportunities of IRC. The main opportunities are Sutara project, and Amur River Bridge. So we continuously disclose our opportunity one about the Sutara project. I want to tell some additional information to what was already announced in the previous our report. First of all, so the total initial CapEx to bring the Sutara pit into operation is expected to be $50.6 million, of which $17.5 million had already incurred as of 30, September 2022. The remaining $33.1 million is expected to be self-funded by cash flow gain generated by K&S. The production capacity issues are expected to improve when the Sutara becomes operational. The company expects that Sutara pit will be the long-term solution as the geological information confirms that the ore at Sutara has higher grades of iron ore magnetic profit. K&S is actively preparing the Sutara deposit for the operation, with the aim of processing ore from Sutara by the second half of 2023. Sutara project has been advancing according to the program, and it has more than 30 years of mine life. The next opportunity is Amur River Bridge. According to the report in media, the construction over the bridge has been completed, and the Russian-Siberian Railways is now connected to the China's Northern railway network. The bridge is expected to be put into use by the end of this year. The railway bridge is expected to enhance the region's economic development by providing a more efficient transportation alternative on top of the existing ferries and the railway routes. The K&S mine is situated approximately only 240 kilometers from the bridge side, and IRC's nearest customer within China is approximately 180 kilometers away from the bridge. Thus, IRC is as well as its customers will benefit from the project with the reduced transportation distance and shipment time. The railway bridge can also alleviate any railway congestion of the region. Shipping time to the customers in China will be reduced from 3 to 5 days to 1 to 3 days. At the end of my speech, I want to tell, as we head into the fourth quarter of the year, the operating environment, in particular the iron ore price further deteriorates and K&S is generating negative margins. If the situation persists, we may have to consider scaling down its operation. IRC's financial position could be significantly adversely affected. This is a challenging time and the IRC Board will take a cautious approach in dealing with the adversities. Thank you so much. Please ask your questions.

[Operator Instructions] Johnny, there seems to be no questions online. Thank you.

Great. Thank you for joining the call today. We are now ending the meeting. And thanks, everyone, for joining the call. We appreciate your time. And if you have any questions, which you are not -- you may still free to contact us at any time or you can check our website at www.ircgroup.com.hk. With that, thank you, and have a great day. Operator, I think we can end the call. Thank you very much.

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

Goodbye.