irc limited 1029 hk) · irc limited (1029.hk) is a leading iron ore mining operator in the russian...

31 Aug, 2020

IRC Limited (1029 HK)

1H20 results beat with profit turnaround. IRC Limited (1029 HK/ IRC) posted a strong interim result on rev growth 19% YoY from US$ 89.2m to US$ 106.17m. Net profit reported as US$5.9m, vs. a net loss of USD25.2m on last year. EBITDA grew 51.4% to USD35.9m in mine production, while Group EBITDA up 1.5x to USD33.2m. IRC beat our estimates mainly due to: 1) Lower net cash cost (US$48.8/t in 1H20 vs. US$51.2/t in 1H19); 2) Global iron ore shortage lifted demand with ASP jumped from US$77.2/t to US$82.6/t; 3) Sales volume increased rapidly from 1,239,397 tonnes in 1H19 to 1,380,516 tonnes in 1H20 amid China infrastructure and economies activities resumption. IRC declared nil interim dividend.

We expect EBITDA reaches double in FY20 thanks to effective cost control and ASP increased. Management noted that the group benefitted from the weak Russian Rouble, while US Dollar remains at a consistently high level, thanks to the company operating model as the company’s income is mainly denominated in US Dollars with operating cost mostly denominated in Russian Rouble. We remain our weakened view of Russian Rouble in the second half of this year given the outbreak of coronavirus has seriously delayed Russia economy activities resumption, along with some other emerging market currencies dropped. As such, we expect IRC will continue to deliver stronger EBITDA growth. We lifted the company's FY20-21E earnings by 20% to reflect the lower cash cost model.

Robust iron ore price will be sustained. Iron ore prices have soared to multi-year highs given supply shortage that unfulfilled the global iron ore demand. The spot 65% iron ore prices rose to around US$130/t to reach the highest level since 2014. In addition to this, China is reviving economic activity to stimulus infrastructure buildings, boosting the iron ore price likely to be sustained in 2H20. In July, China imported a record 112.65m metric tons of iron ore, a rise of 24% from a year ago and up 10.8% from June, according to customs data. Meanwhile, Brazil, the world’s second-biggest producer of iron ore, had curtailed supply due to weather and the pandemic of the COVID-19, which we predict it takes time for iron ore producer to slightly recovering the shipments in 3Q20. We maintain our positive view of spot 65% iron ore price will stand at US$120/t, which will further benefit IRC full years of revenue growth.

65% Fe price remains buoyant as a greater price premium over 62% Fe expected. Management mentioned that the tightened pollution control policy by the Chinese government will benefit the price growth of 65% Fe grade due to the high-quality infrastructure development is required. Consensus estimates the price premium between 65% Fe and 62% Fe will be widened to US$19 from US$8 between Aug 2020 and Dec 2021E. We believe the price premium of 65% Fe will remain resilient in upcoming years which is good for IRC sales enhancement as IRC produces and sells 65% Fe.

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Solid 1H20 results with profit turnaround; initiates BUY

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Anli Research 31 Aug, 2020

K&S mine is ramping up to full capacity. K&S commenced commercial production since 2017 and ramped up to an average capacity of 89% in 1H20, which is 11% higher than 1H19. Management stated that the K&S capacity has reached 90% in July to Aug, while the previous experience of mine capacity has also reached 100% in Oct. We think the current capacity utilization is on track to achieve at least 92% of capacity in 2H20 to reflect the higher demand of iron ore production.

We have a BUY view on IRC with a target price of HK $ 0.154 per share, implying a 47% upside. Our BUY rating on IRC is a valuation call, due to a strong positive catalyst of iron ore selling price increases with continues cash cost reduction, its current valuation remains undemanding among commodities peers. Key risks include a sharp correction in the H-share market, a larger impact of the COVID-19 outbreak, spot iron ore price decreased sharply.

Fig.1: IRC posted a strong interim results

Source: Company data, Anli Research estimates Source: Company data, Anli Research estimates

Source: Company data, Anli Research

Fig.2: We forecast company growth will reach 20% YoY by FY20E-21E respectively

Fig.3: We predict company's margins remain positive in full year



Fig 4: IRC achieved a strong sales volume with higher ASP and lower cost

Source: Company data, Anli Research Source: Company data, Anli Research estimates

Fig 5: Company production and sales volume remain sustainable growth

Fig 6. IRC's profitability breakdown

Source: Company data, Anli Research estimates

Source: Company data, Anli Research

Fig 7. We think the price of 65% Fe remains to enjoy a price premium by 2021



Fig 8. IRC existing project review



IRC Limited (1029 HK): Financial Summary


IRC Limited (1029.HK) is a leading iron ore mining operator in the Russian Far East. The company is principally engaged in producing high-quality iron ore concentrates, with long-term relationships with China and Russia customers. K&S project is the company's sole operating mine for the sale of the iron ore concentrate, followed by other projects including Kuranakh (100% owned), Garinskoye (99.6% owned), Kostenginskoye (100% owned), Bolshol Seym (100% owned), SRP (46% owned) & Giproruda (70% owned).

Company description

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irc limited 1029 hk) · irc limited (1029.hk) is a leading iron ore mining operator in the russian...

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