IRC Limited (1029) Earnings Call Transcript & Summary

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

Great. Thanks, Bivvy. Good afternoon, everyone. I'm Johnny Yuen, and I'm the Finance Director and Company Secretary of IRC. I would like to welcome all of you to IRC Limited conference call for the 2024 Annual Results Announcement of the company. Apart from me are with us today, we have our CEO, Mr. Denis Cherednichenko as well as our CFO, Danila Kotlyarov. [Operator Instructions] A brief Q&A session, which you can ask in English, Mandarin or Cantonese, will follow the formal presentation. As a reminder, this conference is being recorded. Announcement and the PowerPoint slides for use in this call has been uploaded and you can download the documents from our website at www.ircgroup.com.hk. [Foreign Language] It's now my pleasure to turn the call to our CEO, Denis. You may begin the call, please.

Thank you very much, Johnny. So good afternoon, dear shareholders, dear investors. Let me start with our presentation. So you have our presentation, I hope, in front of you. So please let's start with the highlights of 2024 on #5. In general, I want to say that revenues decreased by 12.6% to $221.2 million, mainly due to all quality issues in the first half of 2024. I will tell you about this a little bit later. The cash cost of $86 per tonne was 9% higher than last year, mainly due to the introduction of the temporary export duties and inflation. Loss attributable to shareholders improved and amounted to $20.5 million, with no impairment provision in 2024. Cash and deposit balance increased to $60.7 million following the completion of the rights issue. And net cash of $15.9 million following completion of price issue, a scheduled loan repayment of $17.8 million and voluntary loan repayment of $5 million. And adjusted EBITDA, including nonrecurring items and ForEx exchange reduced to $9.3 million and adjusted underlying loss amounted to $15.4 million. And also production volume little bit decreased by 3.6% to 2,378,000 tonnes. And by this sales volume decreased as well by 7.4%. And please let's move to the Page #7, our operational K&S and production sales in 2024. I want to tell about this that the lower ore quality at the depleting Kimkan mine has led to a decrease in yield and output, resulting in lower production and sales volume, especially in the first half of 2024. And it was expectable and several times on our calls told about this. But due to the Sutara commencing mining operation in July 2024, we significantly improved operation metrics in the second half of the 2024. Main infrastructure allowing for Sutara ore processing in K&S plant completed in 2024. Federal road flyover bridge over Sutara River and mine infrastructure. And a positive impact of Sutara is evidenced by increasing production rate of K&S plant at the following capacities. In first quarter 2024, it was 67%. In the last quarter of 2024, it was 81%. And right now also, I will ask Danila to continue with some financial results of 2024. Danila, please.

Thank you, Denis. Ladies and gentlemen, yes, I would like to give you a quick outlook of the main information about our results of previous year. If you look at the Slide 9, here, we have the major information about our KPIs. Yes, I can only add to what Denis already explained that it was difficult year -- last year in terms of operations. I guess it was one of the most difficult ones in the history of K&S and it was expected in some ways. And the main reason was operational because there was a decrease in the quality and the grade of the ore, which we were mining and post in the first half over the last year and resulted in the -- it significantly impacted the results in terms of our cash cost and also our EBIT of K&S and the group. Yes, here in the table, you can see all this information, which is reflected in the main figures. Unfortunately on top of our issues with operation, there was significant decrease in the iron ore market and it was reflected in the equal decrease in the realized price for the K&S product. And this altogether with the decrease of sales volumes and decrease in the price, it gives decline in the revenue. Unfortunately, because of the inflationary pressure on our cost and also a decrease of the yields, which are decreased in line with the deterioration of the quality of the ore. We have also increased in the cash cost, which resulted also due to the introduction of the export duties, which fortunately ended at the end of last year. As a result of all this, which I just mentioned and also Denis mentioned, we have a significant decrease in profitability of K&S in the group with last year, our EBIT of the group was on the level of USD 26 million. So in this year, it was only USD 9 million. In terms of the CapEx, it was more or less in line with the last year, and it was primarily in relation with the Sutara CapEx, and we expect that we will commission the Sutara project by -- in the middle of this year, which will positively reflect and keep on reflecting on the efficiency of the K&S plan. The changes in the cash generated by operations is in line with the decrease of the overall profitability of the group. If you look at the next slide, we have the P&L. He has basically already explained -- Dan has already explained all the major numbers. I can just add again, in this year, we don't -- as a result of the last year, we were not required to be the impairment, which reflects basically that in the long term, in our view and in the view of the auditors, the performance of K&S is sustainable and we will be able to recover all the costs, which are booked in our balance. On the next slide, you can see the balance sheet of the company is basically it's a reflection of the P&L. There's not much I can add. So on the next one, on the slide 12 well, the information about the cash flow of the company. I think the notable here will be the improvement of the trade receivables at the end of the year, which was a reflection of the improvement in the cross-border payments. We were mentioning at the beginning and in the middle of the last year, the issues which arose because of the sanctions which were implemented against the Russian companies and business which was dealing with Russian operations and which was reflected on the speed of the transfers and also -- it also led to the increase in the working capital K&S, but we were able to improve this. And at the end of the year, there was a notable changes against the amount of the working capital that we had at the beginning of the year. I can also add a note that in terms of the repayment of the borrowings, there was a $5 million, which we repaid in advance of the schedule using the money, which we raised -- which we raised in the rights issue at the end of the year. We were planning this in line with the usage of the rights issue funds. And we were paying the tranche of the loan, which was more expensive and this will allow to optimize our interest cost and improve our P&L this year. Yes, if you move into the next slide, there is information about the cash cost of K&S. As you can see here, the main increase in the cash cost is in relation with the mineral extraction tax, which is the reason of the decrease in the subsidy as we were bringing K&S is enjoying the subsidy in terms of the taxes, but it will be -- it's gradually kind of decreasing. And yes, this year and the next year will be the last year when we enjoy this subsidies. And so in terms of the rate, there was a gradual decrease in the amount of the subsidy, which we are getting, especially in relation to the mineral extraction tax, and it is reflected in the increase on -- of this in TCC. The major increase in relation with the export duties, which we mentioned already, but really these export duties expired at the end of last year. So this year, they won't impact our cost. The increase in production overall at the sites means this is a reflection of the general inflationary pressure on the cost of K&S and also in relation with the litigation, which we were doing in relation with the contract with China National Electric Engineering Corporation, which we successfully, kind of, resolved at the beginning of this year. Yes, in overall, if you look at the next slide, it gives you a more graphical information about what were the reason and drivers of the decrease in the EBIT of the last year against the previous year. And I can explain again that like the major impact as you can see on the chart here is a decrease in the price, which is unfortunately result of control of the management. Second big one is the increase in export duties, which is unfortunately also a result of the control of the management. And the main one was the decrease in the production and sales volume because of the decrease in the quality of the ore Kimkan, although I can add, if you look at the green bars, then we were able to improve the profitability of the K&S with improved -- improvement in the recoveries out of the ore and also the yields out of the ore. And this was the result of the improvement in the technological process of the K&S mine. And this was -- and this is the merit of the management of K&S. And we can also -- we can also -- we can also note the impact of the depreciation of the ruble with almost all of the cost of K&S denominated in rubles. So it was a big benefit, which covered the part of the inflationary pressure on ruble cost. And with all this, we have the results which we've got, and we believe that over the course of this year, with the improvement in the yields and the quality of the ore with the absence of the -- the absence of the export duties, we will be able to improve the results. And we are looking at the better results this year. So on the next slide, there is an information about the liquidity of the company. As we mentioned already, the cash balance increased at the end of the year, and it was due to the rights issue, which we completed at the end of the year. We used the part of the cash to repay the more expensive tranche of the loan. We have also the plans of using the remaining amount also on decreasing the gearing of the company and also on our investment projects, including our Sutara project and also the project of investing in our own mining equipment, which will allow us also to improve the profitability and efficiency of K&S Kenya operation. Yes, I think this is the main information, which we won't like to update in relation with the results of the last year. And yes, I'm handing over to Johnny kind of explain about the completion of the rights issue we did at the end of last year.

Yes. Thanks, Danila. So if you look at Slide 17, what we did in October was that we have done a non-underwritten rights issue, in which case, we managed to raise USD 46 million for the company. We are very happy about the fact that the rights issue was very much welcomed and oversubscribed by around 22%. So we are very grateful to support the shareholders. And after the rights issue, I think our balance sheet has significantly strengthened. All right. If you look at the slide -- previous slide in Slide 15, we are now showing a net cash position of around USD 16 million. And even during all these years, from day 1 when K&S was in commercial operation, in 2017, we have always been in a net debt position. But now because of all this year's hard work as well as this rights issue, now we are in a much better position in terms of the cash position. So I think this is a very positive milestone that the company has achieved. And the bottom part of the table shows the current shareholding, which is the last slide of shareholder deck. As you all might know, our 65% shareholder and the rest are being held by other general corporate shareholders. I guess that concludes the formal part of the presentation, and we are happy to take any questions you may have. Bivvy, can you please put us through to the Q&A session, please?

[Operator Instructions] Our first question comes from K S Lee.

[Foreign Language]

[Foreign Language] So the question is that obviously, we have quite a lot of our corporate activities last year. In earlier this part of the year, we had the GO and then the later of the year, we have the spread issue. So we would like to know what's the plan of the company? Is there any plan for doing that, any particular future outlook? Denis, do you want to take it?

So Danila, could you answer this question?

Yes, of course. I can provide the comments. Yes, we did quite a lot of the corporate activities. Yes, the reason of the rights issue as Johnny explained already was like raising -- was raising the liquidity in order to improve the balance sheet of the company, especially in light of the -- of the wallet situation in terms of the iron ore market, of the ruble exchange rates and we -- and especially with being in transition between the Kimkan mine to Sutara Mine. So we are -- there is quite a lot of the capital expenditures, which we are experiencing. And as we previously were explaining, we are putting a lot of efforts to improving the efficiency of the company. And we will require capital in order to invest in the completion of Sutara, invest into the initiation of the project or replacing the mining work, which are currently been with external companies to replace with our own mine equipment, which should improve the resilience and quality and the efficiency of the mining work, which is the main -- which is the main operational expenditure. And it kind of all this requires the capital. So that's why we were required to do the rights issue. At this point of time, we believe we raised the capital, which we require. And right now, yes, we, as a team, we hope we are not aware of any plans to do like any other corporate activity, but the situation is kind of, yes, is changing. So in the future, we currently -- we cannot predict. But at this moment of time, we don't have any major plans.

[Foreign Language]

[Foreign Language]

So I'll answer the question. It's related to impairment. So Mr. Lee said that right. So he saw us making impairment around USD 160 million last year. And then this year, while obviously, the iron price has gone down, so that's why we have very poor set of results. So with the iron price going down and then why is that there is no impairment this year? And so what's the base for assessing and determining impairment?

I can answer the question. So yes, I think the question is valid, but I can explain the reason. Although last year, there was -- we booked impairment. Yes, I think it was on the back of the significant decrease in the long-term outlook of the price. If you look at, yes, an average price in the year -- on a year with all the previous year were quite good around one [indiscernible]. I believe it's correct on the high-grade iron ore and the outlook on the price was better. Although there was -- after that, there was a decrease in the outlook and the long-term outlook on the iron ore prices, it decreased also. And if we look at the last year, there was -- although there was a decrease in the price, there was decrease in -- yes, in the average price, although the long-term outlook on the iron ore price, it did not decrease significantly. That's why in a long-term run -- it's kind of in the long run, there is no significant impact of this on our impairment model. And also the important is that yes, a year ago, there was significant increase in the risk premium, which is -- which was reflected in the cost of capital, which we were applying. One of the reasons it was the conflict between Russia and Ukraine and the level of sanctions, which was applied. Kind of last year, the kind of situation settled a bit. It was -- yes, it was evident that kind of the Russian business adopted like to these problems. And it was evident also that like all these problems and sanctions almost did not affect the operations so far as we see as well. So the country risk premium in relation with the Russian-based business is also decreasing. So although it could look that the outlook and kind of the spot prices are constantly decreasing. But actually, in the long run, there was no big decrease, almost no decrease in the iron ore prices last year. And kind of at the same time, there was a little bit increase in -- there was also a decrease in the risk premium. And also in our model, we assumed a number of the positive changes, which I mentioned earlier. Number one, it's improvement in the efficiency, which we achieved on the back of all the limitations and improvements in the plan which we did and also our plans in relation with upgrading the mining. So all this together, yes, it resulted that we don't have to plan on this year.

[Foreign Language]

[Operator Instructions] Our next question comes from Winnie.

[Foreign Language]

[Foreign Language] So Winnie has been our shareholders for a few years and she is aware of the fact that obviously Sutara's commenced operation. So she would like to have some guidance of what we shall do in 2025, but how helpful it will be to our core as well as our production capacity?

Yes, Winnie, that's a good question, we can answer it. Yes, I think the positive impact of Sutara operation has been already reflected in our results of the last year. Denis mentioned already, if you look at the slide on our PowerPoint, there is information about the capacity of the plant at the beginning of the year and capacity of the plant at the end of the year and there is a significant increase, but in Q1, it was below 70% of the capacity, in the last quarter, it was 81%. This year, we are planning to increase it as high as the proportion of the Sutara will increase and also one of the good signs of how it positively effected the results of the company. If you look at our interim results of the last year, the EBIT of the group in the first half of the year was negative around -- let me give you the number. It was minus USD 2 million in the first half of this year and the full year is -- it's around $9 million. It means that in the second half of the year, we earned about $11 million of the EBITDA. And most of it, which is very important, was kind of achieved in the last quarter when the proportion of the Sutara increase. So this year, we are positively looking in terms of the increase of the capacity of the plant or the production volumes and of course, profitability. But we shall be aware of some like macro changes, which we are not in control. And one of them is the exchange rate with the positive news in terms of geopolitics and kind of lifting of sanctions regime. We've seen the significant -- a significant depreciation of the ruble, which has a very negative impact on our whole because we explained we have -- all the costs are denominated in rubles. And yes, without the depreciation -- without depreciation of the ruble and with the high inflation of the ruble cost, kind of our TCC will inevitably be increasing. So at the end of the last year, the exchange rate of the ruble was about 100. So currently, it has significantly appreciated. We believe that this appreciation will, kind of, it will not be long lived, but with a high interest rate in Russia and with a positive geopolitic news, it attracts a lot of demand on the Russian assets and on the deposits in Russia ruble. So that's why at this moment of time, all these effects are reflecting in the significant appreciation of the ruble and relative increase in the cost of the company. So this is negative. And we are carefully looking at this negative impact on our profitability, but we are positively looking that in any case, if ruble will be more in line with our expectations and that is the kind of level, which we have achieved at the end of last year, then the result of this year was definitely -- we expect it will be better than last year.

[Foreign Language]

[Foreign Language]

Question from Winnie again. So right issue, we've got quite a lot of cash. So the question is why is that we are not paying back the loan? Obviously, we have $60 million cash, $45 million of loan. I mean, why don't we pay off more loan, given the high market interest rate? And then with all this cash and Sutara coming online, is there any chance of paying dividend to long-term shareholders like we?

Yes, good question, Winnie. Let me try to answer it. Yes, I think in terms of the capital allocation of the money, which we raised on the stock market on rights issue, I think the priority probably -- I think we were telling this in the past, the priority will be and kind of in terms of capital allocation is the capital expenditures, which are vital to the future and the development of the company. And in the Sutara project and also the investment in the mining fleet of K&S because we believe that Sutara -- I think it's very evident that like without Sutara, there will be no operations in K&S anymore because basically, the depletion will come already. So yes, gradually, it will be decreasing and decreasing. So with mining fleet, we believe it's crucial to keep -- to kind of keep our cost on check and also make sure that we have operational efficiency, which we can manage. This is number one. And this, we are doing already. So approximately out of the money, which we raised on stock exchange, half will be invested in the mining project and a little bit in the completion of Sutara project. Yes, second part of the capital allocation, as Winnie is quite right to mention is that with a quite expensive loan that we have, we are planning to repay. So we're paid already. In the last year, basically, we paid around $5 million. And actually, this quarter, we already repaid already about kind of $12 million. So altogether, the amount which we are going to repay in advance is around like USD 17 million. With all this as kind of we're explaining, so this will be all the money which we raised on the stock exchange. And yes, kind of after that, we will be looking at the cash flow generated by K&S. And yes, if the macro environment, especially with all these changes and volatility, which is happening at the moment kind of will be favorable in the future then, I guess, the Board of Directors will be looking at also the capital allocation in terms of the dividend.n The problem is that, unfortunately, right now, if you look at our net results, we are loss-making. And in terms of the net cash position, as kind of already explained, we are going to invest in the first priority, which is investment program and second priority, which is the deleveraging kind of. After this in the future, like next year, if the company's results are good and we earn like net income and we also earn positive cash flow, free cash flow. In that case, yes, I guess, it will be the stock, which Board can look at.

[Foreign Language]

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

That will be great. Thanks a lot, Bivvy. We've got some great questions today. And so thanks a lot for everyone for dialing in. So we appreciate your time, and thanks for joining the call. So if there's further questions, you can contact us any time. Our contact details are listed out in our corporate website, being www.ircgroup.com.hk. [Foreign Language] With that, thank you, and have a great day. We'll speak to you soon. Okay, Bivvy. I think we can end the call. Thanks a lot.

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