Rana Gruber ASA (RANA) Earnings Call Transcript & Summary

Welcome all to this webcast presenting Rana Gruber's first quarterly results as a listed company. My name is Gunnar Moe, and I am the CEO of Rana Gruber. With me today is our CFO, Erlend Hoyen, and my good colleague will present our financial results for the quarter. Please note that a recording of this presentation also will be available later at our corporate web page. Today, our presentation will be a special addition, covering some important topics from our investor presentation ahead of listing late February. We take you briefly through some selected topics before we move on to the quarterly results, ending with a Q&A session. Please note that you may now ask questions for the Q&A session by sending an e-mail to [email protected]. Let's jump to it. Rana Gruber is the only iron ore producer in Norway, located in the heart of Norway [indiscernible], with more than 200 years of history. Our products of iron ore concentrates and our specialized product, Colorana, are sold in the international market mainly to customers in Europe. We will now take you through some key highlights describing our company. We are a Norwegian mining company, extracting iron ore from underground mines and open pit mines in the mountains surrounding [Indiscernible]. Our annual production capacity is 1.8 billion metric tons of iron ore concentrate. We have now a fully invested infrastructure and operations, enabling us to run operations with less operational and financial risk. Our products are all natural, and we do not add chemicals in the production. We are the producer globally with lowest CO2 emissions, and we have decided to reduce all CO2 emissions to zero by 2025. Let's have a closer look at our operations. We are operating in the beginning of the value chains, covering the steps from mining to the enrichment process. The end markets for our iron ore products are cars, buildings, infrastructure projects, supplying steel and also markets for specialized products such as water purification systems. We mine the iron ore from open pit and underground mines. The iron ore is transported to our processing plant by downhill railways from the enrichment process will be finished. Finally, ships carry the finer products from port at our location to customers around Europe. I will now take you through some more details about our products. More than 90% of our production is the iron ore concentrate hematite. Hematite is concentrated iron ore bulk products formulated for metallurgical applications. Customers are mainly large steel manufacturers and applications are in buildings and production of cars. Magnetite is our second largest product area, and it is utilized among customers in the chemical industry. Historically, magnetite has yielded premium prices and almost all of the product goes to water purification systems in Europe. Our own brand and specialized product, Colorana, is based on 2 types of magnetite concentrate. The product is sold to producers of brake linings, magnetic stripes, chemical processes and paints. So let's have a look at our historic production levels and financial performance. As mentioned before, our production capacity is 1.8 million metric tonnes, and production over the past 5 years has varied between 1.6 million and 1.8 million metric tonnes. The right-hand chart displays our historical EBITDA performance. For 2020, we reported an EBITDA of NOK 666 million. As we will see later in the presentation, EBITDA for Q1 '21 has already exceeded 50% of previous year's EBITDA. We have launched 3 strategic projects, which will enable product margin expansion and reduced CO2 emissions from production. Let me share a few comments about each of these strategic projects. Lifting the production to iron ore with higher iron ore concentrates from 62% to 65% will strengthen both our long-term market position and profits. A significant price premium is expected from this transformation. In addition to increasing the iron ore content, we have also launched 2 other strategic projects, expanding magnetite production and reducing CO2 emissions even further through electrification of mining equipment. We are crystal clear that we are going to cut CO2 emissions to zero by 2025. Today, we are already the industry leader supported by the lowest carbon footprint of 6 kilograms CO2 per tonne, around 40% below the industry average. Through this, we will be the world's first carbon-neutral iron ore mine. And how will we do this? We will substitute all mining equipment with electric equipment and the traditional railway transportation will be replaced with either electricity or hydrogen as fuel. In total, these efforts will enable a reduction of 11,000 tonnes CO2 per annum. We will revert with an update on the progress of these projects towards the end of this year or early 2022. Let's move on to our performance in the first quarter of 2021. It's truly been a milestone quarter for the company. Most importantly, we have ensured safety for all our colleagues during the pandemic. At the same time, we have delivered the best quarterly results in the company's history. -- driven by all-time high prices for iron ore. The historically strong quarter for Rana Gruber was marked by doubled revenues and operating profits, EBITDA 3x higher than Q1 '20. The prices for iron ore jumped during the quarter, supported by among other governmental spending on infrastructure projects globally. The Board of Directors have concluded with a dividend of Norwegian krone 2.90 per share for Q1 '21, equal to 70% of our net profit. This is the upper range of our dividend policy. Now I will leave the word to CFO, Erlend Hoyen, for the financial review.

Thank you, Gunnar. Happy to be here. Now also figures will be nominated in Norwegian krone, if not otherwise mentioned. Revenue doubled from Q1 '20 to Q1 to iron ore as well as some minor volume effects. Our production has been fairly stable over time. But we mine a natural resource based on physical limitations. So some variations will occur. However, production for Q1 '21 amounted to 411,000 metric tonnes, 5% higher than Q1 '20. EBITDA was tripled since Q1 '20 to NOK 345 million for the quarter, resulting in an EBITDA margin of 65%. Now let's have a closer look at our production for the quarter. First, I'm glad to report that we had another quarter with no injuries or accident, and our sick leave rates continued to develop positively. The increase in production was in line with the mine plan and within the variation expected from the ore quality. As you can see from the slide, our main product hematite represents more than 90% of our production. Now we are moving from 1 mining level to another level 155 to level 123. This is a regular part of our business, but shifting mining levels may lead to some increased variation in production volumes in the upcoming quarters. In Q1 '21, we increased the open pit production by 27%. This was due to planned build-up of raw material stocks needed for the upcoming quarters. Now let's look at the cash costs and margin for our 2 largest products, hematite and magnetite. Cash costs for the quarter increased by 11% to NOK 440 per metric tonne for our 2 main products. The increased cash cost was mainly driven by higher activity in the mine. Please note that the cash cost is equal for our 2 main products, hematite and magnetite. One example, listening to cash costs is the increased mass removal of 200,000 metric tonnes in the quarter in addition to reduced CO2 compensation as well as IPO-related costs for the quarter. Cost discipline and efficiency initiatives, reducing the cash cost per metric tonne is a key part of the company's strategic priorities going forward. The EBITDA margin for hematite and magnetite came in at 65% and 61%, respectively. Now let's have a look at some other key features. We have taken you through the revenues and operating part of the P&L. I will briefly comment on some of the elements displayed here. Financial items of minus NOK 105 million in the period, mainly consists of losses related to hedging iron ore. Hedging positions entered in 2020 are expected to generate losses also going forward as these positions were entered into a different market situation, but we expect that the magnitude of these losses will decrease gradually as an increased share of the hedging positions was entered into at higher levels. For the rest of the year, the company also has secured USD 36 million at an average exchange rate of NOK [indiscernible]. This is evenly distributed throughout the year until the end of 2021. In sum, this implies a net profit for the quarter of NOK 155 million compared with NOK 18.1 million in Q1 '20 which corresponds to earnings per share of 4.15, up from 0.48 in the same period last year. Now let's go through the cash flow for the quarter. Total cash flow for the first quarter was NOK 188.1 million compared with a negative NOK 8.1 million for Q1 last year. This increase was mainly driven by increased sales volume and higher prices for hematite compared to the last year. Strong operational performance also led to an increase in cash holdings, which by the end of first quarter totaled at NOK 213.1 million. Total CapEx for the first quarter was NOK 37.5 million, of which NOK 33.5 million was related to development CapEx and NOK 4 million was related to maintenance CapEx. Development CapEx is mainly related to the new mine level, level 123, which was finalized in March. This mine level is expected to produce iron ore for the next 5 years. Restructuring of the company's debt after settling the receivables towards [indiscernible] mining in the IPO process as well as some extraordinary dividends to previous owner prior to the IPO process drove the changes in the financial cash flow. Now let's have a look at the financial position at the end of the first quarter. We finished the quarter with a solid financial platform, enabling us to deliver on our dividend policy as well as keeping momentum on our strategic projects. The company's debt situation has been restructured, and we now have obtained a very sound capital structure with an equity ratio of above 50%. The company's debt, excluding leasing obligations, now consists of a single loan of USD 7.6 million, which is expected to be repaid evenly over the next 2 years. We also have an unused credit facility of NOK 100 million. This concludes the review of the financial performance, and I would now like to leave the word back to Gunnar for his final remarks.

Thank you, Erlend. To sum up, this has truly been a remarkable start to the year for Rana Gruber. Not only have we become a public listed company, we have also initiated several strategic projects, which will give us a solid foundation for long-term growth in both revenues and profitability. Financially, this quarter was particularly strong, supported by all-time high iron ore prices. On this basis, the Board decided to pay out NOK 2.90 per share as dividend, corresponding to 70% of our earnings per share. So far into the second quarter, the market has remained strong, with increased demand from infrastructure projects globally post COVID-19 combined with supply side limitations. Based on market fundamentals today, we expect the market will continue the positive trend also next year. As in response to the strong market, we have secured some volumes for 2022 at high prices. Looking into the next 2 or 3 quarters, production volumes are expected to vary due to the recent shift to a new underground mine level. With a positive market outlook, Rana Gruber is also well positioned to pursue other growth opportunities as well as initiatives to reduce cash cost in our business. This concludes today's presentation. And please note that we will revert August 26 for our report for the first 6 months of 2021. I would now like to open for questions from [indiscernible].

One question related to our foreign exchange exposure, how large is this and what's nominated in foreign exchange. All of our sales is in foreign exchange. So the foreign exchange exposure is quite large. The hematite production is solely in U.S. dollar and our magnetite production is sold in euros. The foreign exchange exposure is also partially offset by some of our costs related to diesel and electricity is in dollars and euros.

We have a question here, how we do prepare for times with lower prices. Well, we always have a constant focus on costs, and this will increase -- this focus will increase in the years in the future. We have also reduced our debt situation enabled us to have a strong financial situation. And we also are -- we have started some investments to prepare for the future of lower prices. So we -- overall, we think we are well positioned for the future, even with lower prices. There's a question here about our outlook and expectations to the market. Well, Q2 in 2022 is substantially higher than Q1. We also expect higher prices in the rest of this year, together with all the -- most of the analysts internationally, which they also expect higher prices in 2022. How high these prices will be is not possible to predict, but we expect historically higher prices both '21 and '22.

Let's see how large is your hedging portfolio of iron ore. We have total of 600,000 tonnes secured at different prices of iron ore. 360,000 of these are secured in 2021 and 240,000 tons are hedged in 2022.

Yes, we have a question here about the spot price of the product and the deal with the contract we have with Cargill. And Cargill is -- has to take all the volumes. They have -- we have a sales and marketing agreement with Cargill, and we sell through Cargill directly to customers. But it's always linked to the spot price and contracts with the customers. And of course, the contracts directly can't be mentioned here, but the prices are linked to the spot price.

Yes. What do you see on the cost side? What is temporary increase due to the new mining levels? Or will costs continue to go up? There are some increase due to the new mining level and activities of preparing the drilling of the new net level that will continue for some period going forward. But in the first quarter, we also had a quite large mass removal balance for preparing for the upcoming quarters with the variations that we expect from the underground mine. And maintenance stop in the summer and the holidays that are coming up. But we don't have any expectations that the cost will continue to go up now. And we also expect that the IPO costs that we had in the first quarter will go down.

Well, there's a question about projects that may strengthen the position of Rana Gruber for the future. Well, we have mentioned the most important ones earlier, we -- and, of course, the effect of the Fe-65 is extremely high. So that is, of course, our main focus. But we will also look into other possibilities in the market. But at this time, I can't go into further depth of these projects. But the 2 main drivers for getting us in a stronger position in the future is the Fe-65. We will gradually increase the Fe content in the products and of course, the increased production of magnetite. Both of them will give us higher revenue and better prices.

You recently announced hedges for end of 2021 and 2022. Can you discuss your thoughts around these hedges? Yes. We think that the hedging volumes that -- the forward curve of iron ore is always in backwardation. So there's always a price in hedging iron ore going further into the calendar. But we have seen several spot days reaching all-time high prices, driving the curve in end of '21 and '22 at very high historical levels. And therefore, we think it is sensible to secure a large part of the cash flow through these hedges. And we think it will enable us to deliver on our dividend policy going into 2022 and further as well.

Question here. You have a low CO2 emitter and targeting to get even lower. How do you think around monetizing this fact? Well, For the time being, there are not higher prices for concentrates with low CO2 emissions. But we are quite sure that for the years to come, this will be the fact. The environmental benefit of this is the first and most important one, but we also think that this will give us higher prices in the future because of the end customers will such as the car manufacturers will search for raw materials with low CO2 emissions.

We also have a question related to shipment dates related to the actual realized price if -- let's say, if the question is if timing of shipments has something to do with the actual realized price that we get. Both yes and no. When the ship leaves the harbor here, we get the prepayment from Cargill. That is based on a snapshot picture some days before the [indiscernible]. But the final settlement of the ship is done 3 months later on a monthly average. So the prepayment cash flow varies from the different day fluctuations in the spot price, but the final price that we get from the shipment is on a monthly base average.

And we can also add that there are elements in the contracts with customers that are linked to bulk rates. So if the bulk rates increases, then we -- that also will be reflected in the process that we get. We have a question here. Iron ore prices were well ahead of when you set the 50% to 70% dividend payout ratio guidance. Is the payout ratio fixed or given the higher realized prices, could the dividend payout ratio increase? For the time being, the ratio is between 50% and 70%, and we have already signaled that the first quarter was delivered on 70%. And I can't comment further on that because the Board of Directors has the final saying on this, but the target is almost 70%.

I think that concludes the Q&A. The questions that we haven't been able to answer now in the live Q&A session, we will obviously answer on e-mail afterwards.

I would like to thank everyone for attending this webcast, the first quarterly presentation for Rana Gruber. Thank you, everyone.

Thank you all.