IRC Limited (1029) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to the conference call. Johnny, please begin your call, and I'll be standing by. 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 Limited 2022 Annual Results Conference Call. Apart from me with us today, we have our CEO, Mr. Denis Cherednichenko; as well as our CFO, Danila Kotlyarov. [Operator Instructions] As a reminder, this conference is being recorded. Announcement in PowerPoint slide were used in this call has been uploaded, and you can download the documents from our website, www.ircgroup.com.hk. [Foreign Language] It's my pleasure to turn the call over to our CEO, Denis Cherednichenko. Denis, you may begin.

Hello, dear shareholders. Hello, dear investors. So it's a pleasure to make annual results full year finished with 2022. Let me tell some words about our highlights in 2022. So a there are several financial highlights I want to announce, and so in detail, our CFO, Danila Kotlyarov, who will tell later. First of all, our revenue decreased by almost 25% to $278.8 million in comparison with $371 million in 2021, so it's following a 25.3% decrease in market, 65% iron ore price. That is why so the revenue decreased as well. Nevertheless, so the cash cost only increased by 9.9% to $78.8 per tonne. So in comparison with the previous year despite high Russian inflation and significant Russian rubles appreciation. And also, the year was quite successful for us. Nevertheless, of all these challenges, nevertheless, of decreasing of the iron ore price and despite the Russian inflation. EBITDA excluding nonrecurring items and FX reduced to $56.5 million, and underlying profit amounted to $25 million. So nevertheless, of all these challenges. But I need to announce that there is a loss attributable to shareholders amounted to $87.9 million. Mainly it is due to noncash impairment of $103.2 million. So also, we have decreased our net debt to $41 million. So in 2021, it was $61.1 million, following loan repayment and debt equity swap with our main creditor MIC. And gearing reduced to 17.4%. So net-debt-to-EBITDA ratio increased to 0.74 due to lower EBITDA, but anyway, so it's below 1. Now some operation highlights. The production volume increased by 0.5% 2,570 kiloton despite temporary scaling down of operations in fourth quarter 2022 and other operating issues. Sales volume also increased but couldn't have been improved if not a railway logistics issues due to COVID-19 pandemic and poor weather. So we talked about that in our quarterly report. And also, the company continue having a good safety standards with no fatality, and so our LTIFR maintained at a low level of 0.66. So some -- on the Slide #7, I want to make some points about the [ K&S ] operations. Production and sales in financial year 2022. You can see that the average price was 25.3% lower in 2022, and production increased by 0.5%. So we had several bottlenecks. First also with the production. The issue was the lower ferromagnetic and issues with the mining contractors. We did some solutions. First of all, we use Sutara deposits and additional mining contractors, and in-house mining fleet was used. And we still continue to solving this problem. And also, it was the railway logistics congestion in season. Amur River Bridge was built, and we can use only in the end of the year. And I can say that it's still not operational in -- with the full capacity. So I want to say that production and sales volume increased despite underperformance of mining contractors, railway congestion issues. I think you're familiar with the problem of delivering a huge amount of coal to China and this is why so we really compete with my -- so-called factories. So for the railways. And temporary scaling down an operation in fourth quarter 2022. Mining volume decreased due to underperformance of mining contractors, and it was resolved by the end of 2022. The ore at Sutara has high grade of ferromagnetic. K&S is actively preparing this pit for operation with the aim of starting to mine the ore at Sutara at the end of this year, 2023. The opening of Amur River in December 2022 is expected to improve logistics efficiency and elevate railway congestion. Now I ask our CFO, Danila Kotlyarov, to continue with the financials. Please go.

Ladies and gentlemen, good afternoon. I would like to give you a brief update about our results for the last full year. Can you please look at the -- at the next slide, where we have the key information. As Denis mentioned already, the total amount of sales year-on-year have decreased. But as you can here, it decreased almost exactly in line with the decrease in the price of iron ore. As you can see here, there was a significant decline in the supplies over the last year and as the price of the K&S product is linked with the price in this reflected in our realized price as well and obviously being the total amount of the revenues. We have seen also, as Denis mentioned, the increase in the cash cost of production of K&S. As we can see here, we have seen a 10% increase in costs, which we believe is quite a good result. If you will look at the rate of the rubles inflation in Russia and also what was unusual last year, a significant depreciation of ruble, especially at the beginning of the year. So in light of this, this month, this increase in the cost, we believe, is quite moderate, and I will give you more information about this later. So as a result of this, we have seen a decrease in the underlying cost of the company, and I will be able to give you a more detailed information about the main figures later. So if you look at the next slide here, we have detailed this information about P&L of the company. And as I told already about, I explained already about the revenues. I would like to make a note here that, yes, in 2021, we had also $10 million -- $11 million losses on the -- in relation with the hedging -- in the hedging of the iron ore. Yes, over the course of last year, we have used different kind of instruments. We have used the hedging of iron ore using options. And it did not -- it's not realized in any, it did not realize any [ gains ] or loss. In terms of the cost, as I mentioned already, the majority of the increase of the cost is -- it has to do with the increase of the mining rate -- of the mining rate of the companies, which engaged on doing the mining work in K&S. And also, yes, the effect of the ruble inflation on certain items of the cost and in the next 4 slides, I will explain this. In terms of the G&A, there was a significant G&A over the last year. But as we explained this during our 6-month account, it's primarily in relation with the one-off payment which company -- during the change of the Board meeting in the last year. And we believe that it's our aim is that this year, the level of G&A costs will be lower. In terms of the other items, yes, the major one, of course, is the noncash impairment of the mining assets of around $100 million which is basically the reflection of the change in sentiment in terms of the price of an iron ore, especially at the year-end. As you know, after the reopening of China in cancellation of the Zero COVID policy here the sentiment and the station on the market of iron ore has approved, but we are bind by the standards of the reporting. And this assessment of the impairment, it was done as at the end of the last year, which also reflects the estimate about the increase of the cost and also rubles inflation at the end of the year. On the next slide, you can see the main information about balance sheet of the company. The main changes here, I can give you a brief explanation as well. So in terms of the decrease in the property, plant equipment, this is the impact of the impairment, which I explained already. In terms of the increase in the working capital of the company, as we reported at the end of the year during our quarterly update. As at the end of the year, there was a significant increase in the accounts receivable for the company. Yes, it was -- the reason of that was a delay in payments of our customers in China, but we can report now that as of today, the station has significantly improved and the amount is normalized. And so this problem was resolved. So the other item, which we see significant change is the decrease in the borrowings. But as we reported already, we did a partial conversion of the debt into equity, and the result of this repaid the significant amount of the loan, and I will also be able to give you more information about this later. So the next slide, we can see the main information about the cash flow of the company over the course of the last year. It's basically the reflection of what I already explained. So the major amount of the repayment of the borrowings, it is the cash flow generated out of issuance of the new shares, which allowed us to make a significant repayment of the loan, which in light of the increase in interest rates, it has a positive effect on the P&L of the company. In terms of the capital expenditures, the CapEx, yes, primarily is in relation with development of Sutara project and is in line with the previous year. As we explained already in the quarterly update, the majority of the CapEx in relation with the Sutara is planned over the course of this year with the name of beginning the mining of the ore at the end of this year and processing of the ore at the beginning of the next. So interest expense, we have seen decrease. This is a result of the repayment of the loan and then other repayment and in the [indiscernible], I explain already. So I would like to give you a slightly -- I'd like to give you more explanation about the increase of the cash flow. If you look on the next slide, here is the breakdown of the cash cost of K&S. And it's very clear, if you look at this, where we have seen the increase. And primarily, the increase was in relation with the mining. As you know, the majority of our mine operations, it is done with the factors who are doing in for the mining or mine operation of K&S. And we have seen the increase in the rates over the course of last year. This is primarily is in relation with the Russian inflation and also certain impact of the sanction because the logistics and the delivery of the spare parts, yes, in Russia became like more expensive. And this is inevitably reflected in the cost of doing mine operations and also in the rate of mining. Although, yes, I think we are not the only one who experience in all the companies who engage in mining industry are experiencing this problem. Yes, as you can see here, the rest of the items that we haven't seen significant increase in the costs. I might give a small note about the increase in the mineral -- in the mineral extraction tax. As we reported previously, we've been enjoying a subsidy on the tax, and the amount of the subsidy is decreasing over the years. We have a 10-year like subsidy on the tax , but a gradual decrease in every 2 years. And if last year -- in 2021, we've been enjoying with 0 tax. I guess, last year, we have a small portion of the tax, which will be increasing gradually over the course of the next year. And another article where we have seen the increase in the -- increase in transport cost, but this is -- this primarily is the reflection of the increase in the amount of seaborne sales, where we have more expenses -- more such cost of transfer. So on the next slide, I would like to give you the explanation of how all this impacted the underlying profitability of the company. As you can see here, the analysis year-on-year of the amount of EBIT, which company has generated a year ago and last year. So -- and with the explanation is very clear if you look at the graph, the majority -- the vast majority of the impact is purely in relation with the decrease in the price of iron ore. And the second largest item is the ruble appreciation. With all our costs, majority of our costs denominated in USD. The ruble appreciation has a direct impact on the U.S. dollar-denominated on the cost, and ruble cost denominated U.S. dollar. Although I would like to draw your attention that we were able to mitigate partially the negative effect of the ruble appreciation, with the hedging of the foreign exchange, by using this we actually have generated a gain on the fixed instruments of USD 4 million, which partially offset, as I said, the negative effects of the ruble appreciation. In terms of the rest of the items, I already explained, it was the increase in the cost of mining. The negative effect of the partial expiry of subsidy and also [indiscernible]. But yes, I think that is the other slide here and. So basically, it explained that the group -- the focus of the group is on keeping the cost and to keep an eye on the cost, and we were able, even in light of the significant inflation in Russia and also appreciation of the ruble, we were able to keep the cost decrease on a quite moderate level. So I think on the next slide there is information that we probably -- we published already. So there is a cash balance of the year. There was a decrease in cash balance. And I think you can see details on the cash flow. As a result of the decrease in the profitability of the company, there is also a slight increase in the level of the ruble. There is a slight increase in the leverage of the company, but it's still on a quite good level below 1, which also reflects that the balance sheet of the company is quite a good order. The information about -- there is also information about the terms of the repayment of the loan. And I just would like to underline here that, as we -- as I explained already this year, as you see, is quite capital-intensive in terms of the capital investments in the development of Sutara project. And yes, I think that the partial swap of the debt into equity, which [ already ] is partially like 50% of the principal, which is due of repayment of the course of this year is -- gives us more confidence that the company will be able to complete the project, the product in full -- even if there will be any significant changes in the -- significant changes in macro parameters. On the next slide, there is information which I, that I think I explained already. And I think that basically all information I would like -- all information we wanted to explain, and we are happy to move to Q&A.

Excuse me, Denis just got disconnected. We're just waiting for him to call back. Please stay on the line. Thank you. Ladies and gentlemen, please stay on the line. We are waiting for Denis to call back. Thank you. Ladies and gentlemen, Denis is back on the line now. Denis, please go ahead. Thank you.

Operator, I mean let's go to the Q&A session, please.

[Operator Instructions] That seems to me no question at this moment, sir. Would you like to conclude the call?

Yes. Thanks, Frankie. So if there's no more questions, we are now ending this meeting. And thank you, everyone, for joining the call today. If you have any questions, please feel free to contact us at any time. Contact us can be referred to our corporate website, www.ircgroup.com.hk. [Foreign Language] With that, thank you, and have a great day. [Foreign Language] Bye-bye.

Thank you for your participation. This conclude your conference. Thank you.

Thank you.