IRC Limited (1029) Earnings Call Transcript & Summary

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

Thanks a lot Phoebe. So, good afternoon, everyone. I'm Johnny Yuen. I'm the Finance Director and Company Secretary of IRC. I'd like to welcome all of you to IRC Limited conference call for the trading update for the second quarter of 2024 of the company. Apart from me today, we have our CEO, Mr. Denis Cherednichenko and our CFO Mr. Danila Kotlyarov. At this time, all participants are in a listen-only mode. 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 were used in this call have been uploaded 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, please, can you begin?

Good afternoon, good morning, dear investors, dear shareholders. Let me provide the second quarter trading update for the 3 months ended June 30, 2024. So, please look at the first slide, #5 Highlights of Q2 2024. K&S, so 13.2% increase in production volume over the previous quarter, mainly due to the comparison being made against a relatively lower base of Q1 2024. Production continued to be hampered by low ore grades and quality at Kimkan deposit depletes. In the first 6 months ended June 30, production volume was 13.5% lower than that on the first 6 months ended 30 of June 2023. But the sales volume increased by 20.6% (sic) [ 12.6% ] over Q1, in line with the production increase in this quarter. Sales volume in first half 2024 was 18.6% lower than that in first half 2023. Sutara stripping operations started in Q2 2024, while mining operations started in July 2024. And Corporate & Industry cash balance decreased to $39.4 million, and net debt increased to $23.9 million, mainly due to the issues with the bank funds transfers leading to delay in the receipt of cash from customers. IRC is working on resolving this issue. The MIC Investment Liability Company loan principal repayment instalment of $4.5 million was due on June 20. In light of the bank fund transfer issues, MIC has agreed to extend the repayment deadline to 15th of August. It is expected that IRC would be able to settle the repayment instalment before the extended deadline. Average Platts 65% iron ore index decreased by 7.4% over $136 per tonne for Q1 to $126 per tonne for Q2. Russian ruble remained stable at an average of RUB 91 per $1. IRC's 2024 Annual General Meeting was held in June 26. All the proposed resolutions were duly passed. And I would pass the word to our CFO, Danila Kotlyarov to announce -- sorry, some information about again, K&S operations. So, I want to say that Sutara will be started in the second half of 2024 as was announced before. And I hope that by this, we will utilize better iron ore inside the Sutara project. And so I want to pass the word forward tell about the financials to Danila Kotlyarov, our CFO. Danila, please.

Ladies and gentlemen, good afternoon, good morning. I would like to give you a quick update about the liquidity of the company at the end of the quarter. So, if you look at the slide with the information about our cash and liquidity. as Denis mentioned already, we have some decrease in the liquidity quarter-on-quarter, around USD 10 million. An the result -- the primary result was the increase in the working capital of the company. And the result of this was the technical issues that we are experiencing with the transfers. So, with the receipt of the transfers of our customers. The reasons for that is the increase in the compliance like matters and the compliance complexity of the banks. We are dealing with this at the moment. But one of -- one of the reasons, main reason was of the decrease in liquidity, was that the [ trade risk rubles ] of the company increased at the end of July. And also as a result of this, we agreed with our lender, with MIC to extend the deadline of the repayment of the loan, which is now -- will be due next week. And currently, we are on track to repay it. So we are dealing with this issue. This matter is unfortunate, but we are currently in the process of resolving this. Yes, I guess that -- I can give you a quick update about the progress with the Sutara project with the update on the budget. So, if you look at the next slide, there is information about the capital expenditures of the Sutara project. And if you look at the bulk number of the investment against what we published in the previous period, you will notice a slight increase in the capital expenditures. The reason on that is that we previously have been publishing information about the preproduction CapEx. And currently, we have included the capital expenditures in relation with the crush and screening plants, which we will incur in the next year, and this will be a second line of the crush and screening plant. So, currently, we're in the process of commissioning the first line of the crush and screening plant, and it will be operational by the end of the year. And next year, it will be the second line, and this will be a full commission of the plant. Yes, as Denis will explain, the increase in the number plus -- as we mentioned already, that there is significant inflation pressure in Russia and with really more or less like stable exchange rate of the ruble, actually, the dollar costs, unfortunately, are increasing, which is also -- which is also affecting the profitability of the company. Yes, I think that will be all updates, and I believe we can move on to Q&A.

[Operator Instructions] Thank you. Our first question comes from [ Mr. James Lynn ].

Can you hear me?

Yes, all good. James. Please go ahead.

Okay. Great. On the banking problems that you have, is that a problem between transfer between Russia and Hong Kong or Russia and China? And is this problem going to be recurring going forward because you have other debts to pay in 2025 and 2026?

Yes, I can provide the comments. Yes, yes, I can explain. Yes, as you are aware of the compliance in the bank, especially in relation with any Russia allocated business or business which are generating income out of the products, which are produced in Russia, it's -- so the complexity on the bank compliance increased recently. So, the problem that we have now and which I explained was the increase -- it has affected the working capital of the company. So, it's not about the transfer between China and Russia. It was a delay of the payments of our customers. So, it doesn't mean we were not getting the payments, but the time to process the payments have significantly increased, which is not only us who is experiencing this, I think everyone who are trading with China out of Russia experiencing this. And, so although our product is very -- it's not in any sanctioned categories or the company is not sanctioned. So, the [ UBOs ] on the company are not sanctioned previously. And although it's still the time to process the payments, it has significant increase. So, we are currently dealing with this progress -- with this problem. So the payments are done, although the time to process this and the results and increase in the volume of trade -- in the volume of [indiscernible] with our customers have increased and that has affected our cash balance.

I see. And then on the Sutara project, I think on Page 10 of the presentation, you have Sutara project, the mining works started in July 2024. So, can you confirm that, has the mine, has the Sutara mine already started production? Or is it still in a preproduction stage. And if it is in production stage, when will it finish? When will it finish ramp up to the 2.5 million tonnes?

Yes, So, I can answer that. So, as we mentioned -- so the stripping works, the mining works, we began in quarter 2. In July, we'd begin the mining works. So we are mining the ore actually, and we are stockpiling this ore and we began to process this. So the major, the processing of this ore, there are 2 ways: You can either truck this ore out of Sutara and just process this on the processing plant, which is located on Kimkan, it's our original processing plant; or you can crush it and kind of separate the non-magnetic part and transport the crush ore, with a less quantity, which will give you the savings on the transport cost and process the crushed ore. So, crushing and screening plant is due to be commissioned by the end of this year. That's when we will begin to crush and store at the Sutara and deliver it into Kimkan processing plant using -- so, using the bridge and other -- using the bridge, the rolls and other -- [ smelters ] which we are completing. But right now, we are capable to track the raw ore to Kimkan plant and mix it together with the Kimkan ore and with this, we are getting the improvement in the quality. So in some ways, like Sutara is already in operation, because we are already processing Sutara ores. In terms of the ramp-up of Sutara, it's not only the matter of -- it's not only the matter of completing the crushing and screening plant, it is basically the process of depletion of the Kimkan mine and increasing the capacity of Sutara mine, and this process will be going into the next year. And -- so, by the end of the next year, the plan is that we will be getting the majority -- the vast majority of the ore -- the vast majority of the ore only out of Sutara mine. So, we can expect that by the end of the next year, the process of fully transferring our operations to Sutara mine will be very close to completion.

Okay. So, at the end of next year -- so at the current iron ore prices, 60% iron ore is like below $100 a tonne now. I think Sutara is producing 65% iron ore, but then you have a discount on that, right, because of your customer. So at the current iron ore price, let's say, at $100 a tonne, assuming the Sutara project is completely fully online, what do you think the per tonne cost would be? And what would be your margin be?

I'm afraid we cannot give a forward looking -- I cannot give a forward looking statement about costs of K&S on Sutara. I can just explain that we are expecting the improvement of the grade, because currently, we are mining the ore with a very low grade. And if you look at the results against the previous year, you can like notice that the major issue that we have at the moment, which is impacting the profitability, is the decrease in the production and decrease of sales. But we are still processing like the ore in terms of the volumes, like we were processing in the previous year, but we are just getting less product. And of course, we are still expensing all the cost, especially the mining cost, but we are getting less product. So we expect that the situation will improve with commission of Sutara, but we -- whether the inflation -- the inflation globally and then Russia is quite big, and so it's impacting our costs. And your question is largely depends on the macro parameters like the ruble exchange rate. So inflation, yes, [ inflation ] with the costs of the mining operations because they are affected. The cost of mining operations are affected with the sanction regime in Russia because of all the spare parts, with the imported equipment, like the caterpillars, et cetera, et cetera, which companies are using, are still using today. So the costs increase and -- so we -- I cannot give you estimate at the moment because it largely depends on the many -- on the matters which are out of control. So, including the increase in tax regime, because just recently, there was an increase in the mineral extraction tax in Russia and also the corporate tax and so I cannot give you direct answer.

Can you clarify how much has the tax rate increased by?

So, in terms of -- so in the absolute -- in the bulk numbers, 50% increase of the tax rate.

And what was the tax rate...?

The tax rate, it's -- yes, it's calculated -- so the previous tax rate of 4.8% and now it's about 6%.

Yes. I can also add that, yes, this is the increase in tax rate, but the tax itself does not represent a big portion of our cost structure. So, I want to reiterate that while we have this increase in tax rate, if you look at our cost structure, I mean, it's mostly coming from mining and processing. So obviously, the increase in tax rate is an additional burden to us. But I think we need to look at this from a perspective that is not a material line item in the cost structure.

It's not the largest. You're completely right, Johnny. But still, I'm just trying to explain, answer the question that the many like portions of our cost base, we cannot give you the prediction at the moment. And one of them, the biggest, I think, will be the exchange rate because if exchange rate is kept on a current level; one situation, if the exchange rate of ruble is going to depreciate in line with the inflation difference between U.S. and the Russian inflation, then it will be a different situation, because we are very much -- like we are mostly affected by the exchange rate and by the price of the [ iron ore ].

[Operator Instructions] Thank you. Hi, Johnny, there is no further questions.

All right. [Foreign Language] As there are no more questions, we are ending the meeting now and thanks everyone for joining the call today. We appreciate your time, and if anyone has any questions, please feel free to contact us at any time. Our contact details are listed on our corporate website at www.ircgroup.com.hk. With that, thank you, and have a great day. Okay, Phoebe, we can end the call. Thanks everyone. Thanks a lot.

Thank you so much.

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