IRC Limited (1029) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Johnny Yuen, I'm the Finance Director and Company Secretary of IRC. We are IRC Limited, stock code 1029. We are listed in Main Board of Hong Kong. I would like to welcome all of you to our conference call for the first quarter of 2023. Apart from me, with us today are our CEO, Mr. Denis Cherednichenko; as well as our CFO, Danila Kotlyarov. [Operator Instructions]. As a reminder, this conference is being recorded. Announcement and PowerPoint slides were used in this call have 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 to our CEO, Denis Cherednichenko. Denis, you will begin, please.

Hello, good morning, good afternoon colleagues. So I want to tell you, so as usual, so our quarter results and quarter highlights. So right now, so it's quarter 1, 2023 highlights. So a few words about the performance of our K&C (sic) [ K&S ] main plant. So 8.6% increase in sales volume over the previous quarter. And also 6.8% increase in production volume over the previous quarter Q4 2022. We continue preparation of Sutara deposit with the aim of starting the mine operation at Sutara by the end of the current year. So as both the corporate and industry, so key highlights. Our cash balance reduced to USD 24.1 million in comparison with the end of the year 2022. And net debt increased to USD 51.7 million, mainly due to the vessel purchase outflows. About this deal, we will tell you later. And subsequent sale proceeds are expected to be received in the second quarter of 2023. So average, Platts 65% iron ore index increased by 26% over the previous quarter to USD 140 per tonne. And the Russian ruble depreciated by 14% over the previous quarter to an average RUB 73 per dollar. More shipments have been made via Amur River Bridge. And so we trade a vessel and the trading of a vessel is expected to result in a one-off gain of USD 0.5 million following sale completion in the next quarter, quarter 2. So please move over to the Slide #7. Some more details about K&S operations. So as you see, the price comparison with the previous quarter, increased by 26%. So also the production in comparison with the quarter 4 2024 increased by 6.8%, I have said this and also in comparison with the quarter 1 of the previous year increased even more. The same was with sales. So in comparison with the quarter 1. So the change in sales is 20%. And also, you can see, so we're in a good performance with the mining, drilling and rock mass moved, nevertheless of all the circumstances. So sales increased in anyway so -- following the railway congestion alleviated with the Amur River Bridge becoming operational. So -- and we also [ K&S ] is actively preparing Sutara deposit with the aim of starting mine operation by the end of the year. Third-party mining contractors performed satisfactorily during the current quarter; variances in mining volume mainly due to timing and seasonal fluctuations. And also IRC has been seeking and pursuing a more diverse range of investment opportunities to expand the business portfolio. During quarter 1, the group successfully traded a vessel, which upon transaction completion is expected to give rise to one-off gain of approximately USD 0.5 million. The group has received these proceeds of the vessels by installments. So -- and you can see on the slide some information about this. And by this, I will pass the word to our CFO, Danila Kotlyarov. Danila, please.

Thank you very much. Ladies and gentlemen, can you please look at the next slide where we can give you a brief update about the liquidity of the group. As Denis mentioned already in a while there was a net cash outflow of the quarter in the amount of roughly of USD 12 million. If you deduct the cash flow associated with the purchase of the vessel and also the cash sheet associated with our regular repayment of the loan, you have the net cash flow generated from operations with the deduction of the capital expenditures in relation with the Sutara CapEx actually will be positive in the amount of roughly USD 12.5 million over the quarter, which is a reflection of the strong operational results and also of the increase in the price of iron ore, which unfortunately, we see the decline at the moment, but we hope that will be above the market in the future. So on this slide as well, you see the information which we published previously as well about the schedule of the servicing of our loan. As we've been mentioning in our previous announcement, we completed the partial swap of the equity at the end of last year, which elevated -- which partly elevated the cash flow over the course of this year. And yes, I think that you can -- if you look at the slide, it allows us to keep the total amount of servicing of the loan in the annual amount of USD 20 million. While, as you know, there was a significant increase in the LIBOR -- in interest rate and of course the services of the interest is much higher in the course of this year as it was in the previous year, but with the decrease in the schedule of the repayment of the principle is allowing us [indiscernible] in keeping the service of the loan on the level, which is -- which we are comfortable with in line for a big amount of the capital expenditures over the course of this year [indiscernible] Sutara CapEx. We have information about this in the next slide. About the challenges, opportunities, I'm handing over to Denis back. Denis, please?

Yes. Yes. Thank you very much, Danila. So please move to the Slide #12. So I want to tell you about the challenges beyond our control. The first and the main, it is high iron ore prices are very volatile. So we possibly [ selling above all this ]. In Q1, iron ore prices increased substantially. So with the average share price climbing to USD 140 per tonne, as I said. However, iron ore price stand bearish and declined in April '23, as the market has expected too much for demand after the pandemic and recovering the supply side was quicker than demand side. But anyway, so -- and right now, so towards the month of April it is about USD 120 per tonne. And so and you can see that in May, so we don't expect a serious increase of the price. Also, I want to tell about the ruble appreciation increase for K&S operation costs. Russian ruble appreciated -- I already said that Russia ruble appreciated in May. So it lost about 14% and depreciated to an average RUB 73 per US dollar in quarter 1. The weakening of the Russian ruble has a positive impact on operation margin as operating costs of the group are mainly denominated in Russian rubles and revenue is mainly denominated in U.S. dollars. So to provide protection against the appreciation of the currency for the month of January '23, about USD 2 million equivalent of Russian rubles, the expenditure has been hedged using zero-cost collars with puts' strike at about RUB 75. And also group may consider entering into the further foreign exchange hedging contract if deemed appropriate. The name -- the next challenge is rising inflation impact on operational cost. So high Russian production price index of 3.4% in quarter 1, 2023, and we think this change will continue further in the current year. And also, there is a new, I would say, a challenge. It's a Russian windfall tax. An additional one-off tax for year 2021 and 2022. So is expected for the companies in Russia, which showed the profit in 2021 -- seamless profit 2021 and 2022. And as our group had such profits, so we expect that it also [indiscernible] our financial. But also, I want to tell you some -- about some opportunities on Slide 13 and further. The first opportunity on Slide 14, it's our Sutara project. So in quarter 1 2023, so we continue development of the Sutara project, construction of the permanent reinforced concrete bridge over the Sutara River commenced, reparatory works for the construction of the federal highway crossing were completed. Works continued on construction of powerline and substation. And the Sutara deposits stripping and dewatering w works began. So what this project will bring to us, you can see on the Slide 14. Also, I want to repeat that it will have more than [ 30 ] years of mine life. The next opportunity, so we already told about this over the previous quarter and the quarter before. It's Amur River Bridge. As we already reported, so the Amur River Bridge commenced operational towards the end of the 2022 with a limited capacity. And K&S had a made successful trial of shipment via the bridge. During quarter 1, more shipments have been made via the bridge. K&S is planning to include the usage of the bridge, but this will be subject to the bridge capacity, which is currently limited, given that it has just become operational. The latest information is that we know that the customer will work 24/7 on this bridge, and we expect that the number of trains will increase. So it's all from my side. Thank you so much. And so Johnny, please continue.

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

[Operator Instructions] First question comes from [ Daniel ].

Hello? Can you hear me?

Yes, [ Daniel ]. Yes, please go ahead.

Okay. Great. My first question is regarding the buying and selling of the ship of the vessel. So my question is the ship is being bought and sold around USD 20 million, and you're making a profit of around USD 0.5 million, say, in a span of 6 months, which implies like an interest rate of about 5%. So USD 0.5 million, 6 months, USD 20 million, so it's about 5%. Wouldn't it be better to instead actually pay down your debt rather than making a small profit on the ship because your cost of interest on your debt is actually a lot higher than that?

Let me answer the question. Yes, as we mentioned, yes, the outflow of the payment of the vessel took place in the first quarter of this year. But I can add that actually, the majority of the payment was made actually around mid of the quarter. We are in the process of getting the repayment as we speak at the moment. So the partial like repayment of the vessel we received already. And in the next few weeks, we're expecting to get the remainder. So actually, the turnover, if you're asking about what was the actual -- the time of the usage on the cash flow is much less than 6 months. So you can multiply by the interest rate, effective interest rate on exploration, it will be in excess of what we mentioned. Yes, so we can kind of argue whether this is a good return on this investment or not, but yes, it's higher than the average like interest you can get on the deposit and then it's higher than most probably the interest we're paying on the loan. Regarding the early repayment of the loan, while you are quite right, and it would be good. One of the strategies might be deleveraging with the usage of the cash flow. But as we mentioned, especially at the end of last year end, it's also -- I think it's -- we have seen quite dramatic volatility on iron ore variable prices again. We are mindful of the significant amount of the capital expenditures, which we are obliged to spend on the development of Sutara this year. And the timing of this operation with the vessel were aligned with the timing of the capital expenditures. And in order to be secured and safe regardless again any changes to the price of iron ore or some more fluctuations in rubles so our new strategy was that we shall keep a certain amount of the cash flow on our bank accounts in order to be able to fund the Sutara CapEx [indiscernible] with the price of iron ore. And I guess the reason of that is that the development of Sutara is absolutely critical, is not keep up with the production price of K&S and we should be able to develop Sutara will be significant with a decline in prices of iron ore or changes in exchange rates like we've seen in last quarter of last year. So answering your question again, the bottom line is that the profitability -- the return on the CapEx of all this operation is in excess of what you mentioned. We expect to receive all the money in our bank account until the end of the quarter. And then in terms of the capital allocation of this money, we will be looking at the macro parameters. And we are -- our plan is to [indiscernible] supply in order to preserve and safeguard the cash required to complete the Sutara project. And after that, we can move with some other opportunities of capital allocation and I think the priority, as you mentioned, will be the deleverage.

Okay. For the Sutara project, once you have commissioned and is up and running by 2024, what is the annual production for Sutara that you expect?

The Sutara mine is just a source of the -- seed of the iron ore into processing plant of Kimkan and so with the gradual decrease of the mining operations of the ore on Kimkan open pit are going to replace it with the Sutara ore. So it shall not affect the total [indiscernible] 10 million tonnes of ore for run-of-mine. And so -- yes, by design, the completion of Sutara shall not impact the total capacity of the K&S. But as we mentioned, we believe that the quality of the ore on Sutara pit will allow us to improve the production yields of the Kimkan plant and so we hope that we will achieve slightly better results, although we are not talking about the significant increase by design. The capacity of the K&S mine operation both on Kimkan ore or on Sutara ore on the blend of ore, it won't be changed.

Right. So the current production is about, let's say, 2.5 megatons a year. So what you are saying is that 2.5 megatons a year is not going to change even with -- do you see any possibility of increasing the contractors' volume?

Yes, as I mentioned already. If you -- our design capacity is around 3 million tonnes of the product per year. And this what we are trying to achieve. We have some obstacles, including some of the issues with design of all the plan and some problems that we inherited of the changed company, which builds them but -- and some of them is in relation with the properties of the ore. And so as I mentioned, with the work we are doing at the moment, if you -- and if you look at actual quarter-to-quarter, quarter-to-quarter capacity of the plant, as Denis mentioned, we [indiscernible]. We have a steady improvement of the production yields and production volumes. So the total annualized production volume in excess of [ 2.5 million ]. And basically, while we've never seen in order to increase the capacity of the plant and Sutara is one of the measures which we hope will allow us to reach design capacity.

And then on the tax issue, the tax issue. So the 2021 and 2022 windfall tax -- so for 2022, like you actually had an impairment, does that actually count towards the tax? Or does it not count towards the tax?

No, no, it's not. Yes, because impairment is -- it's an IFRS group adjustment which is made on the level of the group accounts of IRC, while the tax is purely like Russian, like tax -- it's a tax innovation in Russia. It means that we are talking about the additional tax like burden in relation with K&S mine. And the tax basis off K&S is obviously different of what you see in the IFRS books of the groups. There is not any impairments in the -- no impairments in the Russian books. And as Denis mentioned, K&S mine was profitable, yes, in both of the year, especially in 2021, when we've been enjoying quite a high level iron ore prices. And we -- what we've generated is a significant amount of the profit both on the group level and on K&S level as well. Although we cannot give you obviously your next question will be what is our estimated amount? We cannot give you this amount because until we see the approved version of the new tax law, we cannot answer actually what kind -- what amount of the tax will be because we legislator is assuming a number of deductions, discounts and what also K&S is using the preferential regime of taxation being in a special area of Russia. And we don't know what the impact will be on the amount of that. So as soon as we have this information, we will announce.

This is a -- is there a range, like 10%, 20%, like what's the range we're talking about?

If you open the public -- the sort of public information, the tax rate is 10% of the excess profit of the year 2022-2021 against the year 2018-2019. And since the K&S was in 2018 and '19 and actually it was in the process of decreasing the capacity and obviously, the iron ore prices were much low. So there is a time space. But in terms of the absolute amount, as I said, I cannot give you the range because we don't know what are the discount, reductions or subsidies which we might use.

Okay. On a separate note, do you have any thoughts about share buybacks?

Yes, I mentioned -- as I mentioned in our previous calls already the share buyback is basically the sort of the dividend. And I think as we mentioned already, the capital allocation of the group between the repayment of the debt deleveraging, funding of the capital investment and dividend is subject to discussion with the Board. And in light of the significant amount of CapEx that we are required to spend in the course of this year because it's crucial, as I mentioned, that we commissioned Sutara. And in light of the significant appreciation of the iron ore prices, I think that the priority at this moment of time is the liquidity and completion of our capital, [indiscernible] program. And as we mentioned, yes, of course that is deleveraging because the interest rates are quite high at the moment and there being [indiscernible] interest. So despite the significant deleveraging which we achieved already. So USD 70 million of the debt were paid quite significant amount over the past couple of years, and I think it was correct...

Okay. Understood. So last question from me for the Amur River Bridge, what is the throughput or the volume that you expect to go through that bridge for 2024?

That's a good question you're asking. Actually, I cannot give you the exact number at the moment because it depends on the what's -- on the desire of our clients, yes, because obviously, it's also -- the sending our products via the bridge [indiscernible] but it also depends on the geography of our customers. And so I can mention, as Denis already told, that we begin to use the bridge. The part of our monthly shipment goes by the bridge right now. And we basically were interested to increase the utilization of the bridge, but we are in active discussion with the government authorities and with investor of the bridge, with the [indiscernible] of the bridge about the terms of the usage of the bridge because this bridge basically is a private project, although with the involvement of the government bodies union but it's a private project. So they're establishing [indiscernible] of the usage of the bridge and rearticulation and in this moment of time, bridge is still operating in a SaaS model, so it's not operating at full capacity because the [ grade ] of the bridge and -- it's just in the middle of the May, as the border grows and is operating day and night. Previously, it was operating only during the day because the customs -- the post of the customs of the borders are significantly raised to full capacity. So we are in discussion with them at the moment and -- but we hope to, yes, increase the usage of the bridge, it can give us a significant improvement. But already at this point of time, give us an advantage in terms of avoiding the problems on the Russian Railways with the significant increase of the turnover of the amount of the goods which are going into the east ports of Russia. The capacity of the Russian Railways has been overloaded and the bridge allows us to avoid the issues if we are sending our goods into a different mode of custom point. We have less problems with the capacity of the railway and it constantly was a problem in the previous year.

[Operator Instructions] there's no further questions at this point in time.

Thank you. Thank you, [ Rachel ]. As there's no more questions, 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, please feel free to contact us at any time. Contact details can be referred to our corporate website, www.ircgroup.com.hk. [Foreign Language] With that, thank you, and have a great day. Thank you, everyone.

Thank you. Thank you for joining the conference. You may now disconnect. Goodbye.

Thank you.

Thank you.