IRC Limited (1029) Earnings Call Transcript & Summary

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

Great. Thanks, Phoebe. Good afternoon, everyone. I'm Johnny Yuen, I'm the Finance Director and Company Secretary of IRC. Now I would like to welcome all of you to IRC Limited, our stock code is 1029, 2022 Fourth Quarter Trading Update Conference Call. Apart from me, with us today are our CEO, Denis Cherednichenko and our CFO, Danila Kotlyarov. [Operator Instructions] As a reminder, this conference is being recorded. Announcement and PowerPoint slides for use in this call has been uploaded, and you can download the documents from our website, www.ircgroup.com.hk. [Foreign Language] Now it's my pleasure to turn the call to our CEO, Denis Cherednichenko to begin the conference call. Denis, you may begin.

Hello, good morning, good afternoon. So dear colleagues, dear shareholders, dear investors. So my name is Denis Cherednichenko. I'm CEO of IRC, and I want to start with our presentation, Q4 2022 highlights. First of all, so about our production, about our manufacturing. So I want to tell you that it was 10.5% decrease in production volume over Q3 '22, mainly due to the temporary scaling down of operations in November, following weak iron ore price. Normal operating capacity resumed in December. And also, we continue preparation of the Sutara deposit with the aim of starting to mine Sutara ore in the second half of 2023. But nevertheless [indiscernible] of production of volume. So in sales volume, the decrease was only 1% and 1.4% over Q3 2022. It's mainly and [indiscernible] is year after year. So mainly just because it's fourth quarter. And there were some problems with the logistics at the end of the year. So regarding the Corporate and Industry. So I want to tell you some highlights. So also, we completed the subscription of new IRC shares by MIC at a total consideration of $19 million. By this, we reduced the group's gearing and strengthen our balance sheet. By this, net debt decreased to only $41.6 million in comparison with the Q3 when it was $51.7 million, following the completion of the subscription shares. Cash balance reduced to $36.9 million in comparison with the Q3 when it was $46 million, mainly due to working capital movements at the end of the year. And also, we can inform you that Amur River Bridge commenced operation in December '22, where it was some delays because we were expecting that it should be done in September. But in December, its -- the operation had been started. And K&S made a success in trial shipment via the bridge. Our production was on the freight train. And also in Q4, China's slowing economy weakened the Chinese iron ore market. Although stimulus policies providing some support to the iron ore prices recovery, the Platts 65% average price declined 4.3% to $111 per tonne but increased to $ 131 per tonne by the year end. And of course, some negative [indiscernible] of the Russian Rouble depreciation to an average RUB 63 per dollar after seeing significant appreciation in the early part of 2022. And some words about the K&S operations, production and sales. As I already said so, we have some decreasing of production. But nevertheless, we kept the sales more or less like the same. And by the year forecast, we see that nevertheless of all these, our sales increased by 0.5%. And also, we see that total production also increased by 0.5%. And I want to say that production reduced due to the temporary scaling down of operation in November 2022, and normal operation resumed in December 2022. Sales in line with the last quarter despite production drop, mainly it's due to railway congestion at the end of the year. And K&S is actively preparing Sutara deposit for operations. And our aim is to start to mine Sutara at the end of 2023. With the K&S operation scaling down, mining activities were also reduced to minimize cash outflow during the low prices and preserve for ore resources. And in September 2022, the Russian government announced a partial mobilization of military reservists in Russia, some -- our workers have been called to the service. As of now, there is no any material impact on the operation of K&S due to this matter. And right now, so Danila Kotlyarov, our CFO, please continue with the financials.

Thank you very much, Denis. Ladies and gentlemen, you can look at the Slide 9, where we provide the highlights of the liquidity of the company at the end of the quarter. As Denis mentioned already, we have decreased in the cash in the amount of $10 million against the previous quarter. And Denis mentioned already the reason that there was a certain increase in the working capital, yes, in working capital of the company at the end of the year, which is normal because it's usually at the end of the year, we made an additional amount of the payment advances in terms of some supplies. And we also had a slight decrease in demand of the trade risk [ rubles ] at the end of the year, but we're expecting that these issues will be alleviated over the first quarter of this year. As Denis mentioned already, we have -- beginning of the previous quarter, we completed the subscription of the MIC. So the total amount of USD 19 million that we have raised that was fully used on the repayment of the loan. And as you see, the result of this, the net -- the debt of the company has decreased in the amount of $10 million. And yes, if you look at the dynamics of decrease of the debt over the past years, we have a significant decrease of the gearing of the company over the course of the past couple of years. And in light of the economic environment with increased interest rates and also minding that our -- the loan that we have, it has a floating rate, we believe that this is a good way of improving the bottom line of the company and also strengthening our balance sheet. So on the next slide, you can see the information about the subscription, which you will be well aware of, and you can see also here the repayment or schedule of the loan. As you can see, the amount that we have raised to repay, and this amount was allocated into the alleviation and the repayment of the principal in the last quarter of the previous year. And also, we basically repaid half of the principal repayments of this year. We believe it's very important to improve the liquidity over the course of this year in light of the significant amount of the CapEx in relation with the Sutara project, which we are planning to complete over the course of this year. But I believe Denis will give more information about this in his slides later. So I think that's all about -- that is all the information we can provide about the liquidity and our financials at the moment, our information about our results will be published in view of course with our annual results, which are expected at the end of March. So I can hand over back to Denis now.

Thank you so much, Danila. So -- and I will continue with challenges and opportunities. Dear colleagues, please look at the Slide 12. So as it was in the last quarter. So the same challenges beyond our control. It is iron ore price are volatile, so it's still continuing. Ruble appreciation increased in K&S operating cost and also rising inflation impact on operational cost. The first challenge is iron ore prices are volatile. We can see the Slide 13. And also you can see and recognize that the last quarter of 2022, so very low prices on our main product. And because of that, of course, this factor is under our control -- beyond our control. And also, it has a very serious impact on our sales and margin. The next challenge on Slide #14, ruble appreciation increased our operating costs in our main production plant, K&S. Just because our spendings mostly are in Russian rubles. And of course, due to the situation where the ruble appreciated, so -- also -- which is beyond our control. So it has a serious impact on our cost. The next is inflation rise, which also impacts on our operation cost on our plant, and you can see that nevertheless, it's decreasing, but nevertheless, so inflation in quarter 4 was very high in comparison with the previous year. But also, I want to tell you about several opportunities. It is on Slide 16. It is Sutara project and Amur River Bridge. The first one described on Slide #17. So we continue with our Sutara project and total initial CapEx to bring the Sutara into operation is expected on the level $51 million, of which about $30 million had already been incurred as of end of 2022. The remaining $31 million even is expected to be self-funded by cash flow generated by K&C (sic) [ K&S ] due to the fact that we have some free cash because of our corporate [indiscernible] the shares. So Sutara's iron ore has higher iron magnetic-grade. It help us to improve the production capacity and also Sutara project has been advancing according to the program, and it will be the long-term solution to improve our production capacity issue. So it will be more than 30 years of mine life. And as I already said, the aim to stat mining at Sutara is second half of 2023.. The next opportunity is starting off moving logistics on Amur River Bridge. So their operation last December '22, it was some testing trains. We already have started sending our goods through this bridge in December, and we continue in January. And also, we will continue in February. It is not the full scope of our production. But anyway, so we improve our logistics. So it's only 240 kilometers to Chinese border from our plant. Shipping time reduced to 1 to 3 days, and delivery distance shortened by over 800 kilometers. So closer distance, higher transportation efficiency and also with the encouraged Sino-Russian economic activities. So it's all for what I want to say, dear colleagues, dear shareholders. Thank you very much. I want to pass the word to Johnny.

Thank you, Denis. Operator, I think we can move on to the Q&A, please.

[Operator Instructions] Our first question comes from Mr. [indiscernible] King [indiscernible].

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language] Danila, I think this question is for you. The question comes from Mr. [ Lung ], who is our long-term supporting shareholders. He would like to know, apart from the credit that we've got from MIC, do we have any other credit lines or borrowing lines which we can draw in case we need it?

Thank you very much about asking the question. Yes, we are thankful of Mr. [ Lung ] for obviously joining us and expressing the interest in the company. So at this moment of time and at the end of the year, we have no other indebtedness, and we have no other liquidity lines. But we actually -- we are looking at this at the moment, and we believe that in the near future, especially with the improvement in the price of the iron ore, we will be able to secure additional sources of liquidity, which we will only use if required. So in brief answering this question, we are actively working on this, and we believe that we will be able to secure this additional source of liquidity quite soon and utilize in case we need it.

Okay. Understood. Let me put it into Chinese. [Foreign Language]

And the next question comes from Mr. [ Davidson ].

Thanks for the presentation. I have three questions. The first question regarding your capital raise with MIC. And the question is, do you have any more capital raising in plan, you know, near future? So that's question one. Question 2 is regarding the Amur River Bridge. In terms of cost per tonne savings, how much cost per tonne saving do you expect to come to you versus to the customer? That's question two. And then question three is regarding the new mine. So in terms of the up-and-coming half year '23, what additional mining production do you expect, and what is the cost per tonne in terms of [indiscernible] production?

For the first question here, Danila, please [indiscernible].

Yes. Yes, question #1 was about the subscription of MIC and whether we have any immediate plans at the moment of additional ones. I think the answer I will give that with the pipeline of the projects which we've got, we were constantly in the past, looking at the source of the additional capital if required. So in terms of the debt capital or equity capital. So the reason why we were looking at raising the capital with MIC in the second half of last year was that the situation with the iron ore or iron ore market was deteriorating. And we have a big amount of CapEx in front of us as you have seen earlier. And the commission of Sutara project and funding of Sutara project is absolutely crucial because this is basically extension of the life of mine of the company, and this project is required to keep up with the capacity, and the reason why we raised the capital was -- the major reason was for securing our opportunity to keep up with the project. And that's why as I've mentioned already the main reason of the raising and allocating this money was to decrease the repayment of the principal on the loan in the next -- at the end of this year and the next year where we have the biggest amount of the CapEx on Sutara. So this last task was resolved. We believe that the company is positioned well at the moment to commission Sutara project. So at this moment, we don't have any immediate plans but as I mentioned already, we and the Board management, we are looking at the opportunity, at the risks, and we are analyzing them on a regular basis. And as you have seen, the prices of an iron ore been -- have seen significant [ like-for-like ] increases and drops in the recent late quarter. And so, all these matters are quite constant, like attention. But at this moment, we don't have the immediate plan. The second question was about the bridge. As we mentioned, we only completed the trial shipment over the bridge at the end of last year because actually, it was just a trial opening in the last quarter of the year, so -- which is only beginning to operate, and we're expecting that it will operate in full or scaling over the course of this year. And it also -- it means also that the fees of utilizing of the bridge both on side of the Russian border and Chinese border, they are being kind of settled at the moment. And we are in discussion with the [indiscernible] of the bridge, and we have discussions with the customer. And we believe that our customers are in discussions with the railways -- with the Chinese railways about the terms of using the bridge, and all these negotiations are interconnected. And I guess, we'll be able to answer your questions about the exact saving on utilizing the bridge over the course of first half of this year. At this point of time, we don't have the precise number. And on the Sutara, I think the question was about of what increase in the capacity will be and what will be the cost of Sutara. Again, we will not be able to give you the exact numbers at the moment, but just like to make it more clear, Sutara project is not the new mine. It's is basically the extension of the existing mine just another ore body which is located in a certain distance out of the existing mine. So there are advantages and disadvantages in terms of the mine in the current [indiscernible] and the new one. So the major advantages is that we are expecting that the quality of the ore will be higher, which shall give us the potential to increase the capacity and also slight improvement in [ costing]. Although there is a disadvantage, which is basically transport lack, which we require in order to transfer the crush ore into the [indiscernible]. And basically, all in all, we expect that it might give a slight improvement in terms of the cost, but it shall not be significant. The major advantage is that it shall give us the improvement in the capacity. And also, it's basically the extension and increase in the life of mine although the exact numbers we will be able to give you when we begin to actually like mining, processing [indiscernible] Sutara. And that, as Denis mentioned, we expect to begin in the beginning of the next year. So I hope that answers your question.

Yes. If I can follow up on the MIC question. You raised capital, which I can understand in terms of needing to strengthen the balance sheet, you also diluted the existing shareholders quite a bit. So the question is, were you not -- why didn't you try to raise capital from existing shareholders? Or do you think that was not possible? And then on the second question, I think IRC did some sort of a deal with in terms of lending to a shipping company to get some sort of income. Can you also comment on that?

Denis, would you like to answer the question or should I?

Danila, please answer.

Yes, in terms of the MIC, I think that we believe that it's at the end of the third quarter of the last year was a drop in iron ore -- with the drop in iron ore price, inflation and appreciation of the rubles and the geopolitical issues and risks and the situation was a bit risky, and we believe that we were quite a source of capital. And in terms of the appetite of the existing shareholders of the company, I believe that the Board was of the opinion that it would be difficult to raise the required amount of capital, and we have the interest of the current [indiscernible] of the company who was willing to do basically a debt equity as well. And looking and weighting all the pros and cons, the Board was of the opinion that it's the best options of de-risk the balance sheet of the company. I guess that's all the comments I can give on that. And the second question was about the vessel. Yes, I think as we discussed already, I think the situation, and we will likely to significantly improve in terms of the pricing in terms of the liquidity of the company at the beginning of this year with the reopening of [indiscernible] and canceling of the zero COVID policy. So we are likely in terms of this. And so looking at our plan on spendings and also on our liquidity, we will look at this opportunity, which would give us additional source of income. And we utilize it, but it doesn't mean that we are now sufficient into shipping business. We just believe it was a short term opportunity, which also give us additional sources of the revenue which we can reinvest in our main business, which is K&S [indiscernible].

[Operator Instructions] Excuse me, Johnny. There's no further questions at this point in time. Thank you.

All right. Thanks, Phoebe. So thanks a lot. Due to timing limitations, we are now ending the meeting here, and thank you, everyone, for joining the call today. We appreciate your time. And if you have any questions, obviously, feel free to contact us at any time. Contact details can refer to our corporate website at www.ircgroup.com.hk. With that, thank you, and have a great day. [Foreign Language] Operator, Phoebe, I think we can end the call here and thanks very much.

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

Thanks very much. Buh-bye.

Buh-bye.