IRC Limited (1029) Earnings Call Transcript & Summary

Good morning, and good afternoon, ladies and gentlemen. Welcome to the conference call. To present today is Johnny. Johnny, please go ahead. Thank you.

Thanks, Phoebe. 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 conference call trading update for the fourth quarter of 2023. Apart from me today, we have our CEO, Denis Cherednichenko; as well as our CFO, Danila Kotlyarov. [Operator Instructions] As a reminder, this conference is being recorded. Announcement and PowerPoint slides for use in this call have been uploaded in our website, and you can download them from our website at 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.

Good morning and good afternoon, dear shareholders and dear investors. So let me start with the fourth quarter trading update. So in the presentation, so if you can see Slide #5. I will start with the key highlights. Firstly on our production. So our production slightly decreased by 0.1% volume over the previous quarter, as there were issues with the ore quality and mining continued to affect production. But sales volume increased by 3.7% over third quarter of 2023, mainly due to the comparison made against a relatively lower base of quarter 3 of the previous year. Despite the various production issues, sales and production volumes for the full year 2023 were only 1.5% and 4%, respectively, lower than those of 2022. And also continuous preparation of the Sutara deposit with the aim of starting of mining operation at Sutara in the first half of the current year, 2024. Some highlights on the Corporate & Industry. Our cash balance increased up to $52.8 million and net debt decreased to $14.9 million, mainly due to the positive net cash inflow. Average Platts 65% iron ore index increased by 10.4% over third quarter 2023 to $138 per tonne. However, on a full year basis, average Platts iron ore index lost 5% and decreased from $139 million per tonne in 2022 to $132 per tonne in 2023. Also, Russian ruble slightly appreciated by 1% in the fourth quarter to an average RUB 93 per U.S. dollar on a full year basis. Temporary export duties, calculated with a reference to ruble/U.S. dollar exchange rate, was introduced in the fourth quarter of 2023 and will remain effective for the whole 2024 year. So by now, $2.7 million was paid in the previous quarter, and windfall tax at the reduced rate of $2.8 million was also paid. And also, mandatory unconditional cash offers launched by Axioma Capital, the main shareholder of the company, during the fourth quarter 2023, was completed in 22nd February, 2024. And by now, Axioma holds 56.7% of shares of IRC. Let's go to the current Sutara operations, that is on Slide #7. So as I already told, the production reduced due to issues with the ore quality and mining. But sales marginally increased due to comparison being made against a relatively lower base over the previous quarter. Despite various production issues, sales and production volumes for the full year 2023 were only 1.5% and 4%, respectively, lower than those in 2022. So K&S is actively preparing Sutara deposit with the aim of starting the mining operation at Sutara in the first half of 2024. And third party mining contractors underperformed in fourth quarter of 2023, which [ remains ] for the K&S operations for the fourth quarter. And I would like to pass the word to Danila Kotlyarov, our CFO, to talk about the financials. Danila, please.

Thank you very much, Denis. So ladies and gentlemen, can you please look at the Slide 9, where we can give you a quick update about the liquidity of the group. So in terms of the changes of the cash balance between the end of last quarter and the end of the year, so we have some improvements. So previous cash balance was around $48 million. And at the end of the year, unaudited cash balance is $52.8 million. We have a slight improvement in the cash balance, and it happened despite the significant amount of the payments we made in relation with the one tax, windfall tax, which we were mentioning in our previous updates. So we set out this payment in mid of November of the last year, which allowed us to get the discount. And we paid the minimum -- we were able to pay the minimum amount available. So it's half of the amount of the tax. There was also quite significant amount of the export duties, which we paid in the last quarter. So these export duties were introduced in October of the last year. And currently, so in accordance with the current legislation, these export duties will be active over the course of this year, and we'll be required to pay them on a monthly basis. So -- and despite this and the servicing of the MIC loan, we have a slight improvement in our activity in the amount of $5 million. But we have taken into account that we have the certain changes in the working capital, and we expect that it will be -- we expect that the number of the change will be reversed in the first quarter this year. And so if taking this out, then our cash will be about flat. So the amount of the debt outstanding at the end of the year is about USD 60 million, and the amount of net debt is $15 million. And I would like to preempt the questions why we are not paying debt like that, why we have quite a significant amount of the interest payment. And I would like to explain that at this moment of time, we are looking -- if you look at schedule here on this slide. So over the course of this year, our total amount of the servicing of the loan, including principal amount and interest, is about USD 20 million. And we'll be able to look at some slides when we talk about current CapEx. We have more than USD 20 million of the critical capital expenditures program, which we are required to pay this year. And with the uncertainty we are facing at the moment with the tax environment, with also the decline in production which we are facing right now because of the transitional year when we are moving to Sutara work, we have to preserve the cash and keep the cushion of the liquidity in order -- in case of volatility of the price. And while in the last quarter, the price environment was quite favorable, as you can see at the moment over the course of the past like few weeks, the price of iron ore declined significantly. And together with inflationary pressure, it puts a lot of pressure on our economics. And so this year, it's critical that we preserve our cash in order to secure our investment program. And after a successful launch in Sutara, we will be able to look at the possibility to decrease our debt. Yes, with this, we can move with the challenges and opportunities. Denis, over to you. Denis?

Thank you, Danila. Thank you very much. So let me continue with the challenges and opportunities. So there are some challenges beyond our control. So maybe I will repeat what I said and pretty much talk about -- that I need to pay attention on these challenges. First of all, iron ore prices are weakening. Iron ore prices as on February 2024 month end was 14% lower than at the 2023 year-end. Ruble is volatile, appreciation would increase on our cost. Russian ruble depreciated in 2023, but remains volatile. And also rising inflation impacts on operating costs. Higher Russian inflation rate, mining costs and other operating cost increased. And also volatile environment, Russian windfall tax, temporary export duties, labor shortage. But also, we have several opportunities, so we are doing so from quarter-to-quarter. It's, first of all, our Sutara Project. So we continue with the Sutara Project. As I have already said so, we plan to start it in the second half of 2024. Total initial CapEx to bring the Sutara pit into operation is expected to be $50.4 million, of which $29.2 million had already been incurred as of end of December, 2023. The remaining USD 21.2 million of the preproduction capital expenditure is expected to be self-funded by cash flow generated by K&S. So also on Slide #13, where you can see some details of the CapEx. And also, I need to tell that Sutara's iron ore has higher ferrum magnetic grade. And so we can improve production capacity. And so, also, Sutara pit will be the long-term solution to improve production capacity issue. And it has more than 30 years of mine life. And the next opportunity is Amur River Bridge. It's different, let's say, it's [indiscernible] and definitely can improve logistic efficiency. The bridge is operational and it's alleviating railway congestion. 150,000 tonnes were shipped with via the bridge in fourth quarter 2023. It's -- from quarter-to-quarter, it improved the logistics, and so it reduced [indiscernible]. And it shows the higher transportation efficiency, encourage Sino-Russian economic activities. Of course, it's costly. But we were able also -- what we see right now that, also, it's more efficient than any others. And also, I want to pass over to Danila Kotlyarov again to talk about the -- our corporate event. So recently [ we completed ] the mandatory cash offer. Danila, please.

Sure, Denis. Yes, So on the next slide, there's information about corporate transaction, which we successfully completed during the last month. So as you probably are all aware, that we have -- so our shareholder, Axioma, has announced an MCO, mandatory cash offer, at -- in like November of last year. And so this process was initiated. So initial -- so deadline of completion was at the end of last year, which we extended and successfully completed in February. And yes, we can announce that -- so at this moment of time, the largest shareholder of IRC is Axioma with a holding of roughly 56.8%, and so the rest is the [indiscernible]. And so this process was completed. And as of now, we have a single recorded shareholder with a holding which is more than 50% of shares of IRC. So I think that concludes all the major bases which we wanted to tell you about. And yes, we are happy to move to Q&A, if any.

[Operator Instructions] And our first question comes from [ Danil ].

can you hear me?

Yes. Yes, we can. Loud and clear.

I have a couple of clarifying questions. The first one is the increase of employees. What's the number of contractors compared to the number of employees?

Yes, let me answer the question. You mean -- so you want to know what is roughly the number of personnel which works from the companies which are doing the mining works. Is that correct? Because this is the major one.

Yes.

So roughly, I can -- so total in the company including the offices. So we have -- so it's -- so at this point of time, the number of personnel is like 1,600, so approximately. And on the basis of our estimates, the companies who are doing only mine operations, it's 400, roughly. I don't have the exact like number of the people, but that's -- I think that's approximate number.

So when you say 1,600, that's the total number of personnel, including contractors? And with the 400, is that 400...

No, it's not included. No, no, no. 1,600 is only our own personnel, which work on K&S mine and also in the office. And 400 is the number of personnel which works -- who are doing the mining operations, but which are not employed by us.

So in total, the number is 1,600 for your own personnel and 400, which is contractors. So all together, it's like 2,000?

Yes, approximately.

Okay. I see. Okay. Second question is on the export tax. So that export tax is going to continue to 2024. Is that going to carry out to 2025 or [indiscernible]?

It's a good question which we are asking ourselves as well. On the basis of -- we can only create the public information on the basis of what government is telling at the moment. These temporary duties, so this legislation, it should expire at the end of this year. Although we -- the matter which is out of our control. So of course -- and that it will be only this year.

Right. Next question is on the Amur River Bridge. You transported 110,000 tonnes out of a total production of 2.5 million tonnes. So the bridge is basically -- [ it is useless ]. It's like...

No, let me explain. Let me give you a clarification. I think because the bridge, if you can -- I think it was in our announcement. But the bridge only began operation in the last quarter of the previous year. So it only was kind of -- so the first like train passed, I think, in September or October. I don't remember exactly at this point of time. But it basically was in trial operation. And so at this moment of time, I think it only carries a few million tonnes of all the cargo, so -- since the moment it began operations. And slowly it's ramping up its capacity. And at this moment of time, we are able to basically to use it on half of our production.

Yes. Just to clarify. In the fourth quarter, around 150,000 kilotons of -- 150,000 tonnes of products were shipped via the bridge in the fourth quarter.

Yes, it's all in the fourth quarter.

Yes.

Okay. I guess my question then is once Sutara is up and running, what do you think is the average annual tonnage to be transported through that bridge?

So the design capacity of the bridge, it can absorb the full amount of the production, yes. In the future, if we needed to, we can use the bridge and basically use it in order to ship all the production that we have.

And in terms of once -- in terms of the startup of the Sutara operation, is your expectation for 2024 and 2025, your production flow is expected to reach [ 2.5 ] mega tonnes a year?

Sorry, can you repeat, please? It was unclear. So what is our production...

What's your projected production for 2024, 2025?

We cannot, I think at this point of time, to tell the number because I think we haven't like publicly disclosed it yet. Although I think we mentioned in our previous announcement and this announcement, and definitely we'll be talking about this in our annual report, that we are in transitional year. So year-on-year, we have some decrease in the production last year. And since this year, we -- so the volumes of the ore we are mining has been kind of declining, and that's only the ore decline and the quality of the ore. And so mainly, the Fe magnetic like in the soil has declined as well. And because of this yield, the production out of the soil has declined as well. So while we will be moving to the Sutara mine and increasing the volume of the Sutara mine, we expect these yields to improve. But this year, we expect a decline of the production against the last year, and with a gradual improvement in the next year and the next year after. And eventually, we are planning that we will reach design capacity. Because at this moment of time, the limiting, like, factor is the grade of the ore.

Okay. One question on your loan facility. I mean when you say it's outstanding loan balance, there's still $68 million left. And the interest payment did like 11%, 12%. It was quite high. How many years do you think you will take to pay it all back, pay the loan back?

Sorry, the connection is not really clear. Can you repeat what's your question? So I got it that it's about the loan, which I was mentioning when I was talking about liquidity. But can you repeat the question again?

Yes. I was just saying the interest rate is quite high. Like how long -- how many years do you think it would take to pay back all of it?

Yes. If you -- yes, I got your question. If you look at the Slide 9 in the PowerPoint, there is a schedule of repayment. And basically, we have -- in terms of the principal, with the current scheduled repayment, it's $18 million this year. It's $19 million like next year. And then we have the bulk of payment at the end of 2026, yes. So if you ask the question why we are, for example, not using the cash which we have at the moment like to go and repay all this loan, I tried to explain this already that this year is quite difficult. We have a lot of pressure in terms of the cost increase because of the high inflation in Russia. We have this unpredictable environment in terms of the taxation and qualification, like these custom duties. So the payments which we made of this, like $6 million in the last quarter of the year, we were not aware about this. We were not aware about the spend which began -- when we began operations in the beginning of last year. So it just arrived out of nowhere. And so the significant amount of the custom duties, which we are going to pay this year couldn't be expected. And in all this environment and in a situation when we have like $20 million of the repayment on the principal this year and more than $20 million of the capital expenditures of Sutara CapEx when -- which is critical in order to keep up with the production, we have to preserve the cash. If we spend this cash now, then, yes, it might be -- we might be in a situation then -- and yes, in a few months, we will be required to borrow more money. And with the current interest rates, I'm afraid that the interest rate like tomorrow will be even more than what we are paying at the moment. So at this moment of time, the view of the Board and management is that we have to preserve the cash. We have to complete the Sutara investment. We have to complete the investment program. We have to launch the Sutara. We have to begin to improve the production metrics. And then like next year, we might look at some opportunities like to -- in terms of utilizing like the cash and optimizing our credit ratio that's like [ valuation ].

Okay. And then on the majority shareholder, what is the change expected? Like what is the majority shareholder planning to change, if anything?

Sorry. Are you mentioning about the MCO, where Axioma becomes the biggest shareholder? Is that what your question is referring to?

Yes. I'm just saying like Axioma owns 57%, 58% now. So they basically own the mine. Everybody else is minority shareholders. So what's the majority owner plan to change in mind, if anything? Like what are the major changes expected from the majority [ shareholders ]?

Denis, would you like to answer this?

Yes, of course. I can answer. First of all, so we really don't know whether the -- so the MCO has been closed recently. And also, I think that we expect that [indiscernible] and we've have discussions with the shareholders maybe to give you at the Annual Shareholders Meeting or any other shareholders events, where we can talk with the new shareholder so to understand the intention. But as we see right now, so the company is continuing with the one that's going on without any changes. And so let's see. At least for now, so there is no -- any special investments or special plans for the biggest shareholder who, with this mandatory cash offer and the duty -- it's the duty of the shareholder to announce this MCO event in the case of reaching the limit of holding 80%. And as you see, some of the shareholders are satisfied with the offer and the main shareholder collected more than 50%. And I think -- anyway, so we will see in the near future. So if there any other plans, the shareholder [ would do ] something with this, so let's see. At least for now, we don't have any information to be shared. So -- and I hope we will share something in the near future.

[Operator Instructions] Excuse me, Johnny, there's no further question at this point in time.

That's great. Thanks a lot, Phoebe. And as there's no more questions, so let's end the meeting here, and thank you for joining the call. If there's any questions, please feel free to contact us at any time. You can find our contact details at our website at www.ircgroup.com.hk. [Foreign Language] So thank you. Let's end the meeting, and thanks for joining.

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