IRC Limited (1029) Earnings Call Transcript & Summary

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

Thank you. All right. Thanks, Bebe. So 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 the company's conference call for the 2023 annual results. Apart from me, with us today are our CEO, Denis Cherednichenko; as well as our CFO, Danila Kotlyarov. [Operator Instructions] A brief question-and-answer session, which you can ask in English, Mandarin or Cantonese will follow the formal presentation. As a reminder, this conference call is being recorded. Announcement and PowerPoint slides for use in this call have been uploaded, and you can download the documents from our website, www.ircgroup.com.hk. [Foreign Language] It's now my pleasure to turn the call over to our CEO, Mr. Denis Cherednichenko. Denis, you may begin, please.

Hello. Good afternoon, good morning, dear shareholders, dear investors. So I want to tell a few words about the annual results of IRC, and the first, so I will announce the full year 2023 highlights. So we used a presentation, please use Slide #5. Revenue decreased by 9.2% to $253 million in comparison with the 2022 where it was $278.8 million mainly due to the decrease in the market, 65% iron ore price. Cash cost of $78.9 per tonne remains comparable to last year. EBITDA, including nonrecurring items and FX, reduced to USD 47.2 million. Underlying profit amounted to USD 8.7 million in comparison with the USD 25 million in 2022. Loss attributable to shareholders amounted to $156.8 million, mainly due to noncash impairments of USD 163.9 million. Cash balance increased to USD 56.6 million, mainly due to positive operating cash inflow and working capital movements. And net debt reduced to USD 11.2 million in comparison with the last debt of 2022, where it was $41.6 million. It was a fair falling loan repayment and increase in cash balance. A few words about the operating highlights. Production volume decreased by 4% to 2,467 tonnes, mainly due to poor ore quality and issues with mining. Sales volume maintained at a relatively stable level, and only decreased by 1.5% to 2,529 tonnes. More shipments have been made via the Amur River Bridge, alleviating railway congestion issues and continuous preparation of the Sutara deposit with the aim of starting the mining operation at Sutara in the first half of 2024. So please move to the Slide #7, I will continue with the K&S separations. So as I already said, so our bottleneck is poor ore quality at the depleting Kimkan mine has led to decrease output, efficiency and profitability. Sutara's highest quality ore will enable K&S to extend its mine's life for more than 30 years and increase their production rate. So highest volume of the rock mass moved since commissioning, helped to support ore mining volumes at depleting Kimkan mine. And also, as I said, so we are waiting preparing Sutara deposit will solve all these problems. And now I want to pass the word to Danila Kotlyarov, our CFO, to talk about the financials. Danila, please.

Ladies and gentlemen, good afternoon. I would like to give you a quick update on our results for the last year. So I would like to be at Slide #9 when we have -- where we have the overview of our results. I would like to give you a few explanation on highlights. On top of what Denis already explained, we have -- in terms of the notable differences year-on-year, we have the significant -- we have a notable decrease in the amount of the revenues. I would like to explain that it was driven by the decrease in the iron ore price, but you might notice that the decrease in the selling price of K&S, it's more than decreased of the Platts index. The reason of that is that we had a bigger proportion of the shipments -- of the shipment via sea route in the previous year, and it's usually the discount of the Platts index if you are shipping over the sea route is less than with the shipments over railway. And with the higher proportion of the sea shipments in 2022, the average selling price, it was a bit higher than it was in the last year. So that explains -- that explains the difference in the pricing. In terms of the cash cost, as you can notice, there was almost no difference between years following the -- in terms of the cost on the delivered basis, but I will give you a little bit more update about this later. With the decrease in the amount of the revenues and the remaining amount of the cost, it's affected our profitability. As a result of this, we have an increase of the EBITDA of the company. So in the amount of roughly USD 46 million. The biggest items which affect -- which affect the results of the company is obviously the impairment. It's a noncash impairment as we had last year, and I would like to give you a little bit more details why we were required of working the impairment. If you look at the number of the previous year, which is approximately [ $100 million ], the main reason of the impairment of the last year was decrease in the outlook of the iron ore pricing, which also was the trend in this year -- which is also was a trend in the last year. But on top of this, we had significant inflationary pressure on the cost of K&S. And the result of this, we had to revise our outlook, our outlook of the profitability of K&S and all this left with the impairment, which we were quite [ lettable ]. But as we were explaining previously, this is a noncash impairment. This was purely the requirement of the accounting. It's purely accounting requirement and some case the outlook of the iron ore prices or the outlook of the cost dynamics will change in the future. This impairment might be referred to what already happened in the past. So I would like to note also the notable like increase in the generation of cash and the results in cash balance, which positively affected the gearing of the company, which I think, at this moment of time, is on a historical lowest level. As we explained and we will explain in the next slide, this is -- it was primarily a result of the positive changes in terms of the release of the -- in terms of the release of the working capital of the company, and I will give you more details later. And it also includes the amount of the prepayment, which we have on the balance of the year, and then we expect that it will be normalized -- it will be normalized in Q1 of this year. With this, let me move to more details about the income statement of the company. So can you move to the next slide, please. I'm not going to repeat about the -- I'm not going to repeat about the impairment and revenues. I guess it requires to explain the significant positive difference of savings, which we had in terms of G&A cost year-on-year. The result of this was in the year '22, we had a significant amount of the bonuses which were paid to the directors, and this is a one-off bonus, but we haven't got this from the past year and that's led to a significant change in savings in terms of the cost and the cash of the company. In terms of the balance, if you look at Slide 11, I guess the major difference here is the impairment of the K&S, which affects -- which affected amount of the PPE on the balance of the company. In terms of the changes in the -- in terms of changes in working capital of the company, I would like to provide a few notes. So the significant really -- the significant decrease in terms of the inventories on the balance sheet is that it was the effect of the utilization of the stockpiles of the world, which, as we explained in the G&A section of our annual report was -- so it was possible due with the [ grid, ] which we made at K&S, and it's a positive news in terms of the durational -- in terms of the duration of K&S. And in terms of the cash flow, it allows us to release significant amount of cash. Big changes in terms of the accounts -- in terms of the accounts receivables and account payables. It's mainly with the relation of the external iron ore, which we'll begin to -- which we begin to trade, and -- which we begin to trade at the end of the last year. And it's -- this increased in both -- in both items, which reflect the prepayments, which we received and with the payments, which we made in relation with this iron ore shipping. And this amount will be normalized as well in Q1 of this year. So next side, as I explained already, you can look at the effects which always changes made on the cash flow of the company. As we can see here, the operating cash flow of the company is more -- is on top of the profit which we generated. And so it was mainly due to positive changes in the stockpiles. That was effect of the decrease in the stockpiles of the iron ore, which is positive and also it was the net effect of the increase in the March payables. It meant that we received more prepayment than [ we did. ] In terms of the rest of the articles, it was the normal in accordance with the schedule of the repayment segment of the borrowings. And I will give you a slightly more information about this in later slides. So we have the increase in the interest expense, which is a reflection of the increase in the -- which is the result of the increase in the interest rate despite the repayment of the principal and -- in terms of the capital expenditure, the majority of this relates to Sutara, which we -- which we're actually moving on. And also the rest of the CapEx is in relation with the ongoing CapEx of the K&S mine, including -- by including the procurement of the new equipment in order to upgrade -- in order to upgrade the product and technology and also, as I mentioned, it made available to utilize the stockpiles, which were previously on the balance sheet of the company. So on the next slide, I can give you a little bit of explanation about the changes in the cash cost of the company and the information which specifically I would like you to note is that while the delivered, like -- so the delivered cost of K&S remains on the level of the previous year, the production cost actually increased significantly. So it's a $10 increase. And this is a reflection of, number one, the reflection of the depletion of the Kimkan mine with the decrease in the quality of the iron ore. We -- and the result of this decrease in the yields of the production, we are required to mine more volumes of the Rock Mass, more volumes of the ore and process more volumes of the ore in order to get same amount of the product, which is the results released -- will be increased in the unit cost. And the largest of this is the unit -- is increase in the unit cost of the mine. In terms of the transport cost, while the decrease, as I explained at the beginning, the previous year we had with the cost of transport, it also included the proportion of the cost in relation with the sea shipments, which includes freight and also reloading at the port, which significantly increases the cost. So if you look at last year, the majority of these costs are in relation with railway delivery, which is cheaper because of the charter business. On the next slide, I would like to give you a little bit of information about the bridging of the EBIT of the group year-on-year and basically underlying kind of explained what I told already with the rest is -- with the factors which affected negatively our results of the last year. Largest of them is the decrease in the sales revenues, which is, number one, the largest of the decrease in the price of iron ore. It's a decrease of the realized price because of the less proportion of the shipments over the sea. And it's also the reflection of the decrease in the volumes of sales. On top of this, we have the significant decrease in the cost of the mine, which is a reflection of the increase in the cost of the transport of the Rock Mass because of the increase in the haulage distance. It's the inflationary increase of the ruble cost of mining with the largest part being the decrease in the cost of the fuel reduction. I can explain a little bit about the increase in the stockpile utilization. The idea is that if you look year-on-year, in the previous year, we worked wide, not only to -- we worked wide not only to increase the cost of the ongoing mine, which was on top of the previous year because of the factors which I discussed already, but we also were required to utilize the stockpiles of -- we were required to utilize the stockpiles of the ore, which we already mined in the previous year. Of course, this stockpiles of the ore, they bear the costs. And this costs, which were in previous years, capitalized on the balance sheet of the company, right now, were released into P&L. And this kind of this cost more relevant to the overall cost of the production of the company on top of what we were required to incur in the period. That's kind of the [indiscernible] increase in cost of mining and also $11 million increase of the kind of utilization of the ore mined previous year to reflect the total increase in the cost in relation with the mine operations because of the deflation of the Kimkan mine results -- the result of this decreased in the context of [indiscernible]. So next is the increase in the cost of the process, and this is mostly in relation with the inflationary pressure on the cost, which includes the cost of electricity, it includes the cost of the labor, it includes the cost of the fuel, et cetera, et cetera. And we are talking about the ruble cost here because we are separating the positive effect of the depreciation of the ruble. So change with the working process synergies. It's also to explain -- it's also explained on top of expensing all the costs which we incurred in the previous year, which we -- and we are looking year-on-year. We're also required to release number of the previously capitalized cost, like with the cost of the ore, which we mined in the previous year, but we also require to utilize the stockpiles for the finished goods, which cost previously capitalized but also released into P&L. Decrease in the transport cost, which is a positive difference, I explained already. This is the difference between the sea shipments and railway shipments. Increase in the taxes quite significant as well as part of this due to the introduction of the export duties, which were introduced in the summer of the last year. It's also the increase in the mineral extraction tax. We had this increase in the past year against the previous year because of the gradual decrease in the subsidy which we are enjoying and also there was additional payment of the property tax, which we were required to do. We are the biggest green life savings. It's -- again, we -- I can remind you year-on-year. We're looking at the previous year 2022. So this is positive effect of the significant depreciation of the ruble, which I said a significant like -- which I said is a significant portion of the increase in the ruble cost, but with [indiscernible]. On this slide, the negative effect of the depletion of the Kimkan decrease in the context of the fee magnetic and general inflationary pressure. It was more than positive effect of the ruble. And the last one is -- it's quite a big saving, which assisted us a lot. It's the decrease in the volumes of the G&A costs, which I explained already and some other items, which were -- is including the trading of the vessel of the profit, which was discussed in the last year. So this, I think, I guess this gave you the main information about our results on the next slide there is information about the liquidity and the movement of the net debt of the company. I think this information we provide on a quarterly basis is nothing new. I can just -- I can only remind again that in terms of the gearing ratio, we are at the lowest for the period, which is quite good because interest rates are high. Although as we were -- we will previously explain and predicting the question why we are not -- predicting the question why we are not repaying the profit debt. The reason is that -- and you can go to the next Slide 16 is that we have a significant amount of the [indiscernible] CapEx, which we have to incur in the -- during the course of this year. This CapEx is absolutely crucial in order to safeguard the future operations of the company in order to improve the profitability, in order to improve the yield and the production capacity we came up. And with the significant changes in the price of iron ore and some movements in ruble exchange and also increasing inflation we have to rely on the cash flow. We have come on in order not to ensure we are completing the investment program on time and on schedule. With all this, I think I conclude my part, and I'll hand the over back to Denis.

Thank you. Thank you so much. So I move to the next slide. And the next chart say about our corporate. So the Slide #18. So we already announced it on our quarterly report. So it's -- we successfully completed mandatory cash offer. So our main shareholder, Axioma, now holds 86.7% of IRC. On 1st of November 2023, Axioma acquired 4.72% shareholding in IRC. And Axioma shareholding, at the time, so increased to 30.6%. Pursuant to the takeover code in Hong Kong, Axioma launched a mandatory cash offer of HKD 0.118 per share to all the other shareholders of IRC. And on the last day of the NGO, of February 22, so the offer was completed with the 26.15% shareholding as set in the offer. And by now, Axioma shareholding in IRC increased to 56.76% of total shares. And also you can see in this table, so the current edition with the shareholder. And also, I want to add that our [indiscernible] who is holder of the debt of IRC sold its shares during the NGO. And also other public shareholders, we have a free [indiscernible] 43.2% of all the shares. So on the next slide, so I don't need to repeat the information just because keep the thing. So with our BOD composition. And by this, I want to finish with the presentation. And so please let's start with the Q&A. Thank you. Johnny, let's start with the Q&A.

Bebe, can you move now to the Q&A section, please?

[Operator Instructions]

So Bebe, if there's no questions, I think we can end the call.

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

Thanks a lot for joining the call. So we are now ending the meeting now. But if there's any questions you may have, you are more than welcome to contact us. Our contact details can be found on our corporate website at www.ircgroup.com.hk. [Foreign Language] Thanks all. And let's end the call, and thanks for joining. Thank you.

Thank you for your participation. Thank you.