Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement. The information set out below in this announcement is provided for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for shares in the Company.
(Incorporated in Hong Kong with limited liability)
(Stock code: 1029)
2019 INTERIM RESULTS
63% INCREASE IN EBITDA OF THE MINE IN PRODUCTION SEGMENT
CONFERENCE CALL
A conference call will be held today at 9am Hong Kong time to discuss the interim results. The number is +852 2112 1888 and the passcode is 5148030#. Presentation slides to accompany the call are available at www.ircgroup.com.hk. A playback of the teleconference will be available from 2 September 2019 at www.ircgroup.com.hk/html/ir_call.php.
Friday, 30 August 2019: The Board of Directors of IRC Limited ("IRC" or the "Company", together with its subsidiaries, the "Group") is pleased to provide the interim results of the Company for the six months ended 30 June 2019.
KEY HIGHLIGHTS
Financials
- Revenue increased by 27% to US$89.2 million (30 June 2018: US$70.2 million)
- EBITDA of the mine in production segment increased 63% to US$23.7 million (30 June 2018: US$14.6 million)
- Write-offof unamortised loan costs, a non-recurring item, of US$11.5 million due to refinancing of the ICBC loan
- Loss for the period of US$25.2 million (30 June 2018: US$15.6 million)
- Underlying loss, excluding non-recurring items and foreign exchange, improved to US$8.2 million (30 June 2019: US$9.3 million)
Operations
- K&S - Production and sales volumes increased:
- Production volume up 16% to 1,262,938 tonnes (30 June 2018: 1,084,602 tonnes)
- Sales volume up 18% to 1,239,398 tonnes (30 June 2018: 1,046,649 tonnes)
- K&S - operated at record-breaking 93% capacity in June; average production capacity of about 80% in 1H 2019
- Kuranakh - Care and maintenance process satisfactory
Commenting on the results, Peter Hambro, Chairman of IRC said:
"IRC's principal objectives are to increase production capacity, improve financial performance, manage corporate risks and, above all, increase value and returns to our shareholders. In the first half 2019, we produced 16% more iron ore concentrate than in the same period last year and the EBITDA of the mine in production segment improved by 63% to US$23.7 million. This good operating result is also attributable to tight cost-controls and, despite general inflation, our cash cost reduced by 3.5% to US$49.9 per tonne in 2019. Production in August 2019 was affected by torrential rain, but it is expected that the weather would soon improve to allow production to be back to normal level.
Since K&S commenced operation, it has always been our intention to refinance the ICBC loan and we are excited to have Gazprombank as our new finance provider. The repayment schedule of the Gazprombank facility is more closely aligned with the K&S's production plan and should improve the cashflow position of the Group. However, the costs of the ICBC facility that were hitherto spread over its life now have to be recognised and this non-cash item accounts for almost half of the reported loss for the period.
While we have a portfolio of undeveloped projects, at present, IRC is essentially a single product company and our financial performance is very dependent on the market iron ore price. To manage this concentration of risk, IRC hedges the iron ore price to reduce the risks of adverse price movements. This is important from a risk management perspective, especially in light of the need to service the Gazprombank facility.
We remain cautiously optimistic about the outlook of the iron ore market. The growing demand for iron ore as a critical element in Chinese infrastructure projects and the massive developments on Belt-Road Initiative look to be here to stay and represent strong new sources of demand, which we believe will help offset the continued global trade disputes. With growing production and an attractive portfolio of future projects, IRC is well positioned to meet this market demand of iron ore. We would like to finish by thanking all of our employees and shareholders for their continuous support."
1
The board of directors of IRC Limited hereby announces the unaudited consolidated results of the Company and its subsidiaries (collectively referred to as the "Group") for the six months ended 30 June 2019 which have been reviewed by the Company's Audit Committee, comprising of independent non-executive directors, and by the external auditors.
INTERIM FINANCIAL REPORT
Condensed Consolidated Statement of Profit or Loss and Other Comprehensive Income
For the Six Months Ended 30 June 2019
Six months ended 30 June | |||
2019 | 2018 | ||
NOTES | US$'000 | US$'000 | |
(unaudited) | (unaudited) | ||
Revenue | 3 | 89,244 | 70,185 |
Operating expenses | 5 | (71,042) | (61,352) |
Depreciation and amortisation | 5 | (14,919) | (9,132) |
Other income, gains and losses | (5,012) | 2,976 | |
Allowance for financial assets measured at amortised cost | 12 | - | (7,548) |
Financial costs | 6 | (24,203) | (10,430) |
Loss before taxation | (25,932) | (15,301) | |
Income tax credit (expense) | 7 | 708 | (336) |
Loss for the period | (25,224) | (15,637) | |
Loss for the period attributable to: | |||
Owners of the Company | (25,204) | (15,619) | |
Non-controlling interests | (20) | (18) | |
(25,224) | (15,637) | ||
Loss per share (US cents) | 9 | ||
Basic | (0.36) | (0.22) | |
Diluted | (0.36) | (0.22) | |
2
Condensed Consolidated Statement of Profit or Loss and Other Comprehensive Income (continued)
For the Six Months Ended 30 June 2019
Six months ended 30 June | |||
2019 | 2018 | ||
US$'000 | US$'000 | ||
(unaudited) | (unaudited) | ||
Loss for the period | (25,224) | (15,637) | |
Other comprehensive income (expense) for the period | |||
Items that may be reclassified subsequently to profit or loss: | |||
Exchange differences on translation of foreign operations | 630 | (547) | |
Fair value (loss)/gain on cash flow hedge instruments | (31,815) | 2,026 | |
Release of fair value loss on hedging instruments in cash flow hedges | 10,660 | - | |
Total comprehensive expense for the period | (45,749) | (14,158) | |
Total comprehensive (expense) attributable to: | |||
Owners of the Company | (45,854) | (14,025) | |
Non-controlling interests | 105 | (133) | |
(45,749) | (14,158) | ||
3
Condensed Consolidated Statement of Financial Position
At 30 June 2019
As at | As at | ||
30 June | 31 December | ||
2019 | 2018 | ||
NOTES | US$'000 | US$'000 | |
(unaudited) | (audited) | ||
NON-CURRENT ASSETS | |||
Exploration and evaluation assets | 10 | 19,689 | 19,497 |
Property, plant and equipment | 10 | 521,884 | 533,446 |
Right-of-use assets | 10 | 11,445 | - |
Inventories | 10,926 | 10,926 | |
Interest in a joint venture | - | - | |
Other non-current assets | 60 | 3,282 | |
Restricted bank deposit | - | 977 | |
564,004 | 568,128 | ||
CURRENT ASSETS | |||
Inventories | 27,945 | 23,168 | |
Trade and other receivables | 11 | 18,254 | 11,027 |
Time deposits | 682 | - | |
Bank balances | 7,604 | 7,637 | |
54,485 | 41,832 | ||
TOTAL ASSETS | 618,489 | 609,960 | |
CURRENT LIABILITIES | |||
Trade and other payables | 13 | (63,465) | (54,788) |
Income tax payable | (272) | (292) | |
Lease liabilities | (3,350) | - | |
Borrowings - due within one year | 14 | (20,710) | (111,954) |
Other financial liabilities | 15 | (21,155) | - |
(108,952) | (167,034) | ||
NET CURRENT LIABILITIES | (54,467) | (125,202) | |
TOTAL ASSETS LESS CURRENT LIABILITIES | 509,537 | 442,926 | |
NON-CURRENT LIABILITIES | |||
Deferred tax liabilities | (2,914) | (3,565) | |
Provision for close down and restoration costs | (11,503) | (10,026) | |
Construction costs payable | - | (8,910) | |
Lease liabilities | (9,509) | - | |
Borrowings - due more than one year | 14 | (211,113) | (100,915) |
(235,039) | (123,416) | ||
TOTAL LIABILITIES | (343,991) | (290,450) | |
NET ASSETS | 274,498 | 319,510 | |
4
Condensed Consolidated Statement of Financial Position (continued)
At 30 June 2019
As at | As at | ||
30 June | 31 December | ||
2019 | 2018 | ||
NOTE | US$'000 | US$'000 | |
(unaudited) | (audited) | ||
CAPITAL AND RESERVES | |||
Share capital | 16 | 1,285,158 | 1,285,158 |
Capital reserve | 17,984 | 17,984 | |
Reserves | (2,697) | 17,216 | |
Accumulated losses | (1,025,756) | (1,000,552) | |
EQUITY ATTRIBUTABLE TO OWNERS OF THE COMPANY | 274,689 | 319,806 | |
NON-CONTROLLING INTERESTS | (191) | (296) | |
TOTAL EQUITY | 274,498 | 319,510 | |
5
Condensed Consolidated Statement of Changes in Equity
For the Six Months Ended 30 June 2019
Total attributable to owners of the Company | ||||||||||
Share-based | Non- | |||||||||
Share | Capital | payment | Translation | Hedging | Other | Accumulated | controlling | Total | ||
capital | reserve(a) | reserve | reserve | reserve | reserve(b) | losses | Sub-total | interests | equity | |
US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | |
Balance at 1 January 2018 | ||||||||||
(audited) | 1,285,158 | 17,984 | 14,190 | (21,882) | (1,852) | 23,766 | (1,068,787) | 248,577 | (33) | 248,544 |
Loss for the period | - | - | - | - | - | - | (15,619) | (15,619) | (18) | (15,637) |
Other comprehensive | ||||||||||
(expenses) income | ||||||||||
for the period | ||||||||||
Exchange differences on | ||||||||||
translation of foreign | ||||||||||
operations | - | - | - | (432) | - | - | - | (432) | (115) | (547) |
Fair value gain on cash flow | ||||||||||
hedge instruments | - | - | - | - | 2,026 | - | - | 2,026 | - | 2,026 |
Total comprehensive | ||||||||||
(expenses) income | ||||||||||
for the period | - | - | - | (432) | 2,026 | - | (15,619) | (14,025) | (133) | (14,158) |
Share-based expense | - | - | 1,112 | - | - | - | - | 1,112 | - | 1,112 |
Balance at 30 June 2018 | ||||||||||
(unaudited) | 1,285,158 | 17,984 | 15,302 | (22,314) | 174 | 23,766 | (1,084,406) | 235,664 | (166) | 235,498 |
Balance at 1 January 2019 | ||||||||||
(unaudited) | 1,285,158 | 17,984 | 16,156 | (22,706) | - | 23,766 | (1,000,552) | 319,806 | (296) | 319,510 |
Loss for the period | - | - | - | - | - | - | (25,204) | (25,204) | (20) | (25,224) |
Other comprehensive | ||||||||||
income (expenses) | ||||||||||
for the period | ||||||||||
Exchange differences on | ||||||||||
translation of foreign | ||||||||||
operations | - | - | - | 505 | - | - | - | 505 | 125 | 630 |
Fair value loss on cash flow | ||||||||||
hedge instruments | - | - | - | - | (31,815) | - | - | (31,815) | - | (31,815) |
Release of fair value loss on | ||||||||||
hedging instruments in | ||||||||||
cash flow hedges | - | - | - | - | 10,660 | - | - | 10,660 | - | 10,660 |
Total comprehensive income | ||||||||||
(expenses) for the period | - | - | - | 505 | (21,155) | - | (25,204) | (45,854) | 105 | (45,749) |
Share based expense | - | - | 737 | - | - | - | - | 737 | - | 737 |
Balance at 30 June 2019 | ||||||||||
(unaudited) | 1,285,158 | 17,984 | 16,893 | (22,201) | (21,155) | 23,766 | (1,025,756) | 274,689 | (191) | 274,498 |
- The amounts represent deemed contribution from the then ultimate holding company of the Company for (1) certain administrative expenses and tax expenses of the Group paid by the then ultimate holding company of the Company in prior years and (2) share-based payment expenses in relation to certain employees of the Group participated in the long term incentive plan of the then ultimate holding company of the Company.
- The amounts arose from 1) acquisition of non-controlling interests and deemed contribution arising from the group restructuring for the Company's listing on The Stock Exchange of Hong Kong Limited, 2) transfer of share-based payment reserve upon vesting of share-based awards resulted from difference between the cost of the treasury shares and fair value at grant date of the awarded shares, 3) deemed contribution from General Nice Development Limited ("General Nice"), a shareholder of the Company, for accrued interests on outstanding capital contribution, and 4) direct expenses in relation to the right to subscribe for shares of the Company granted to Tiger Capital Fund SPC - Tiger Global SP ("Tiger Fund").
6
Condensed Consolidated Statement of Cash Flows
For the Six Months Ended 30 June 2019
Six months ended 30 June | ||
2019 | 2018 | |
US$'000 | US$'000 | |
(unaudited) | (unaudited) | |
OPERATING ACTIVITIES | ||
Net cash generated from operations | 13,069 | 11,675 |
Income tax paid | (37) | (2,367) |
NET CASH FROM OPERATING ACTIVITIES | 13,032 | 9,308 |
INVESTING ACTIVITIES | ||
Purchases of property, plant and equipment and | ||
exploration and evaluation assets | (1,695) | (2,227) |
Time deposits placed | (682) | (306) |
Restricted deposits withdrawn | 977 | 1,000 |
Proceeds on disposal of property, plant and equipment | 92 | - |
Interest received | 26 | 43 |
NET CASH USED IN INVESTING ACTIVITIES | (1,282) | (1,490) |
FINANCING ACTIVITIES | ||
Repayment of lease liabilities | (1,326) | - |
Interest expenses paid | (10,138) | (5,656) |
Repayment of borrowings | (231,010) | (31,200) |
Proceeds from borrowings | 240,000 | 29,824 |
Loan guarantee and debt arrangement fees paid | (9,450) | - |
NET CASH USED IN FINANCING ACTIVITIES | (11,924) | (7,032) |
NET (DECREASE) INCREASE IN CASH AND CASH | ||
EQUIVALENTS FOR THE PERIOD | (174) | 786 |
CASH AND CASH EQUIVALENTS AT THE BEGINNING | ||
OF PERIOD | 7,637 | 8,650 |
Effect of foreign exchange rate changes | 141 | (61) |
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD, | ||
represent by bank balances | 7,604 | 9,375 |
7
Notes to the Condensed Consolidated Financial Statements
For the Six Months Ended 30 June 2019
1. BASIS OF PREPARATION
The condensed consolidated financial statements have been prepared in accordance with Hong Kong Accounting Standard 34 ("HKAS 34") Interim Financial Reporting issued by the Hong Kong Institute of Certified Public Accountants (the "HKICPA") as well as the applicable disclosure requirements of Appendix 16 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.
The financial information relating to the year ended 31 December 2018 that is included in these condensed consolidated financial statements as comparative information does not constitute the Company's statutory annual consolidated financial statements for that year but is derived from those financial statements. Further information relating to these statutory financial statements is as follows:
The Company has delivered the financial statements for the year ended 31 December 2018 to the Registrar of Companies as required by section 662(3) of, and Part 3 of Schedule 6 to, the Hong Kong Companies Ordinance.
The Company's auditor has reported on those financial statements. The auditor's report was unqualified; did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying its report; and did not contain a statement under sections 406(2), 407(2) or (3) of the Companies Ordinance.
In preparing these condensed consolidated financial statements, the directors of the Company have given careful consideration to the going concern status of the Group in light of the Group's loss for the period, its net current liabilities position of approximately United States Dollars ("US$") 54.5 million as at 30 June 2019 and the outstanding bank borrowings and related interest due for repayment in the coming twelve months against the expected future net cash inflows from operations and cash and cash equivalents.
The Group has prepared a cash flow forecast which involves judgments and estimations based on management's input of key variables and market conditions including the future economic conditions, expected production capacity of the Kimkan and Sutara Project ("K&S Project"), iron ore sales and sales prices and the US$/Ruble exchange rates for a fifteen month period after 30 June 2019. The cash flow forecast has been determined using estimations of future cash flows based on projected income and expenses of the business and working capital needs.
However, if the market conditions turn out to be significantly less favourable to the Group than predicted, the Group may not have sufficient working capital to finance its operations and loan repayments resulting in its financial liquidity being adversely impacted. The Group would need to carry out contingency plans including entering into negotiations with banks or other investors for additional debt or equity financing.
The Group believes it has sufficient liquidity based upon the expected cash to be generated from operations to meet its financial obligations as they fall due for the coming twelve months.
8
Notes to the Condensed Consolidated Financial Statements (continued)
For the Six Months Ended 30 June 2019
2. PRINCIPAL ACCOUNTING POLICIES
The condensed consolidated financial statements have been prepared on the historical cost basis except for the derivative financial instruments, which are measured at fair value.
Other than changes in accounting policies resulting from application of new and amendments to Hong Kong Financial Reporting Standards ("HKFRSs"), the accounting policies and methods of computation used in the condensed consolidated financial statements for the six months ended 30 June 2019 are the same as those presented in the Group's annual financial statements for the year ended 31 December 2018.
Application of new and amendments to HKFRSs
In the current interim period, the Group has applied, for the first time, the following new and amendments to HKFRSs and new interpretation issued by the HKICPA which are mandatory effective for the annual period beginning on or after 1 January 2019 for the preparation of the Group's condensed consolidated financial statements:
HKFRS 16 HK(IFRIC) - Int 23 Amendments to HKFRS 9 Amendments to HKAS 19 Amendments to HKAS 28 Amendments to HKFRSs
Leases
Uncertainty over Income Tax Treatments Prepayment Features with Negative Compensation Plan Amendment, Curtailment or Settlement Long-term Interests in Associates and Joint Ventures Annual Improvements to HKFRSs 2015-2017 Cycle
Except as described below, the application of the new and amendments to HKFRSs and new interpretation in the current period has had no material impact on the Group's financial positions and performance for the current and prior periods and/or on the disclosures set out in these condensed consolidated financial statements.
2.1 Impacts and changes in accounting policies of application on HKFRS 16 Leases
The Group has applied HKFRS 16 for the first time in the current interim period. HKFRS 16 superseded HKAS 17 Leases ("HKAS 17"), and the related interpretations.
2.1.1 Key changes in accounting policies resulting from application of HKFRS 16
The Group applied the following accounting policies in accordance with the transition provisions of HKFRS 16.
Definition of a lease
A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
For contracts entered into or modified on or after the date of initial application, the Group assesses whether a contract is or contains a lease based on the definition under HKFRS 16 at inception or modification date. Such contract will not be reassessed unless the terms and conditions of the contract are subsequently changed.
9
Notes to the Condensed Consolidated Financial Statements (continued)
For the Six Months Ended 30 June 2019
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
2.1 Impacts and changes in accounting policies of application on HKFRS 16 Leases (Continued)
2.1.1 Key changes in accounting policies resulting from application of HKFRS 16 (Continued) As a lessee
Allocation of consideration to components of a contract
For a contract that contains a lease component and one or more additional lease or non-lease components, the Group allocates the consideration in the contract to each lease component on the basis of the relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease components.
As a practical expedient, leases with similar characteristics are accounted on a portfolio basis when the Group reasonably expects that the effects on the financial statements would not differ materially from individual leases within the portfolio.
Non-lease components are separated from lease components on the basis of their relative stand-alone prices.
Short-term leases and leases of low-value assets
The Group applies the short-term lease recognition exemption to leases of locomotives and office in Russia that have a lease term of 12 months or less from the commencement date and do not contain a purchase option. It also applies the recognition exemption for lease of low-value assets. Lease payments on short-term leases and leases of low-value assets are recognised as expense on a straight- line basis over the lease term.
Right-of-use assets
Except for short-term leases and leases of low value assets, the Group recognises right-of-use assets at the commencement date of the lease (i.e. the date the underlying asset is available for use). Right- of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities.
The cost of right-of-use asset includes:
- the amount of the initial measurement of the lease liability;
- any lease payments made at or before the commencement date, less any lease incentives received;
- any initial direct costs incurred by the Group; and
- an estimate of costs to be incurred by the Group in dismantling and removing the underlying assets, restoring the site on which it is located or restoring the underlying asset to the condition required by the terms and conditions of the lease.
Right-of-use assets in which the Group is reasonably certain to obtain ownership of the underlying leased assets at the end of the lease term is depreciated from commencement date to the end of the useful life. Otherwise, right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term.
The Group presents right-of-use assets as a separate line item on the consolidated statement of financial position.
10
Notes to the Condensed Consolidated Financial Statements (continued)
For the Six Months Ended 30 June 2019
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
2.1 Impacts and changes in accounting policies of application on HKFRS 16 Leases (Continued)
2.1.1 Key changes in accounting policies resulting from application of HKFRS 16 (Continued) As a lessee (Continued)
Leasehold land and building
For payments of a property interest which includes both leasehold land and building elements, the entire property is presented as property, plant and equipment of the Group when the payments cannot be allocated reliably between the leasehold land and building elements.
Lease liabilities
At the commencement date of a lease, the Group recognises and measures the lease liability at the present value of lease payments that are unpaid at that date. In calculating the present value of lease payments, the Group uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable.
The lease payments include:
- fixed payments (including in-substance fixed payments) less any lease incentives receivable;
- variable lease payments that depend on an index or a rate;
- amounts expected to be paid under residual value guarantees;
- the exercise price of a purchase option reasonably certain to be exercised by the Group; and
- payments of penalties for terminating a lease, if the lease term reflects the Group exercising the option to terminate.
After the commencement date, lease liabilities are adjusted by interest accretion and lease payments.
The Group remeasures lease liabilities (and makes a corresponding adjustment to the related right-of- use assets) whenever:
- the lease term has changed or there is a change in the assessment of exercise of a purchase option, in which case the related lease liability is remeasured by discounting the revised lease payments using a revised discount rate at the date of reassessment.
- the lease payments change due to changes in market rental rates following a market rent review, in which cases the related lease liability is remeasured by discounting the revised lease payments using the initial discount rate.
11
Notes to the Condensed Consolidated Financial Statements (continued)
For the Six Months Ended 30 June 2019
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
2.1 Impacts and changes in accounting policies of application on HKFRS 16 Leases (Continued)
-
Key changes in accounting policies resulting from application of HKFRS 16 (Continued) As a lessee (Continued)
Taxation
For the purposes of measuring deferred tax for leasing transactions in which the Group recognises the right-of-use assets and the related lease liabilities, the Group first determines whether the tax deductions are attributable to the right-of-use assets or the lease liabilities.
For leasing transactions in which the tax deductions are attributable to the lease liabilities, the Group applies HKAS 12 Income Taxes requirements to right-of-use assets and lease liabilities separately. Temporary differences relating to right-of-use assets and lease liabilities are not recognised at initial recognition and over the lease terms due to application of the initial recognition exemption.
As a lessor
Allocation of consideration to components of a contract
Effective on 1 January 2019, the Group applies HKFRS 15 Revenue from Contracts with Customers ("HKFRS 15") to allocate consideration in a contract to lease and non-lease components. Non-lease components are separated from lease component on the basis of their relative stand-alone selling prices. - Transition and summary of effects arising from initial application of HKFRS 16 Definition of a lease
The Group has elected the practical expedient to apply HKFRS 16 to contracts that were previously identified as leases applying HKAS 17 and HK(IFRIC)-Int 4 Determining whether an Arrangement contains a Lease and not apply this standard to contracts that were not previously identified as containing a lease. Therefore, the Group has not reassessed contracts which already existed prior to the date of initial application.
For contracts entered into or modified on or after 1 January 2019, the Group applies the definition of a lease in accordance with the requirements set out in HKFRS 16 in assessing whether a contract contains a lease.
12
Notes to the Condensed Consolidated Financial Statements (continued)
For the Six Months Ended 30 June 2019
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
2.1 Impacts and changes in accounting policies of application on HKFRS 16 Leases (Continued)
2.1.2 Transition and summary of effects arising from initial application of HKFRS 16 (Continued) As a lessee
The Group has applied HKFRS 16 retrospectively with the cumulative effect recognised at the date of initial application, 1 January 2019. Any difference at the date of initial application is recognised in the opening accumulated losses and comparative information has not been restated.
When applying the modified retrospective approach under HKFRS 16 at transition, the Group applied the following practical expedients to leases previously classified as operating leases under HKAS 17, on lease-by-lease basis, to the extent relevant to the respective lease contracts:
- elected not to recognise right-of-use assets and lease liabilities for leases with lease term ends within 12 months of the date of initial application;
- excluded initial direct costs from measuring the right-of-use assets at the date of initial application;
- applied a single discount rate to a portfolio of leases with a similar remaining terms for similar class of underlying assets in similar economic environment. Specifically, discount rate for certain leases of machinery and equipment in the Russia was determined on a portfolio basis; and
- used hindsight based on facts and circumstances as at date of initial application in determining the lease term for the Group's leases with extension and termination options.
On transition, the Group has made the following adjustments upon application of HKFRS 16:
As at 1 January 2019, the Group recognised additional lease liabilities and right-of-use assets at amounts equal to the related lease liabilities by applying HKFRS 16.C8(b)(ii) transition.
The Group recognised lease liabilities of US$12,804,000 and right-of-use assets of US$12,804,000 at 1 January 2019 for lease of wagons at the mining site.
13
Notes to the Condensed Consolidated Financial Statements (continued)
For the Six Months Ended 30 June 2019
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
2.1 Impacts and changes in accounting policies of application on HKFRS 16 Leases (Continued)
2.1.2 Transition and summary of effects arising from initial application of HKFRS 16 (Continued) As a lessee (Continued)
When recognising the lease liabilities for leases previously classified as operating leases, the Group has applied incremental borrowing rates of the relevant group entities at the date of initial application. The weighted average incremental borrowing rate applied is 10.79%.
At | |
1 January | |
2019 | |
US$'000 | |
Operating lease commitments disclosed as at 31 December 2018 | 16,900 |
Lease liabilities discounted at relevant incremental borrowing rates | 12,804 |
Lease liabilities relating to operating lease recognised upon | |
application of HKFRS 16 as at 1 January 2019 | 12,804 |
Analysis as: | |
Current | 2,659 |
Non-current | 10,145 |
12,804 | |
The carrying amount of right-of-use assets as at 1 January 2019 comprises the following: | |
Right-of- | |
use assets | |
US$'000 | |
Right-of-use assets relating to operating leases recognised | |
upon application of HKFRS 16 | 12,804 |
By class: | |
Mining assets | 12,804 |
14
Notes to the Condensed Consolidated Financial Statements (continued)
For the Six Months Ended 30 June 2019
2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
2.1 Impacts and changes in accounting policies of application on HKFRS 16 Leases (Continued)
2.1.2 Transition and summary of effects arising from initial application of HKFRS 16 (Continued) As a lessor
In accordance with the transitional provisions in HKFRS 16, the Group is not required to make any adjustment on transition for leases in which the Group is a lessor but account for these leases in accordance with HKFRS 16 from the date of initial application and comparative information has not been restated.
Effective on 1 January 2019, the Group has applied HKFRS 15 to allocate consideration in the contract to each lease and non-lease components. The change in allocation basis has had no material impact on the condensed consolidated financial statements of the Group for the current period.
The following adjustments were made to the amounts recognised in the condensed consolidated statement of financial position at 1 January 2019. Line items that were not attested by the change have not been included.
Carrying | Carrying | ||
amounts | amounts | ||
previously | under | ||
reported at | HKFRS 16 | ||
31 December | 1 January | ||
2018 | Adjustment | 2019 | |
US$'000 | US$'000 | US$'000 | |
Non-current Assets | |||
Right-of-use assets | - | 12,804 | 12,804 |
Current liabilities | |||
Lease liabilities | - | 2,659 | 2,659 |
Non-current Liabilities | |||
Lease liabilities | - | 10,145 | 10,145 |
Note: For the purpose of reporting cash flows from operating activities under indirect method for the six months ended 30 June 2019, movements in working capital have been computed based on opening statement of financial position as at 1 January 2019 as disclosed above.
15
Notes to the Condensed Consolidated Financial Statements (continued)
For the Six Months Ended 30 June 2019 | ||||
3. REVENUE | ||||
Disaggregation of revenue from contracts with customers | ||||
Six months ended 30 June 2019 (unaudited) | ||||
Mine in | ||||
Segments | production | Engineering | Total | |
US$'000 | US$'000 | US$'000 | ||
Types of goods or services | ||||
Sale of iron ore concentrate | 75,209 | - | 75,209 | |
Delivery services | 13,337 | - | 13,337 | |
Engineering services | - | 698 | 698 | |
88,546 | 698 | 89,244 | ||
Geographical markets | ||||
PRC | 30,720 | - | 30,720 | |
Russia | 57,826 | 698 | 58,524 | |
88,546 | 698 | 89,244 | ||
Timing of revenue recognition | ||||
A point of time | 75,209 | - | 75,209 | |
Over time | 13,337 | 698 | 14,035 | |
88,546 | 698 | 89,244 | ||
16
Notes to the Condensed Consolidated Financial Statements (continued)
For the Six Months Ended 30 June 2019 | ||||
3. REVENUE (CONTINUED) | ||||
Six months ended 30 June 2018 (unaudited) | ||||
Mine in | ||||
Segments | production | Engineering | Total | |
US$'000 | US$'000 | US$'000 | ||
Types of goods or services | ||||
Sale of iron ore concentrate | 69,962 | - | 69,962 | |
Engineering services | - | 223 | 223 | |
69,962 | 223 | 70,185 | ||
Geographical markets | ||||
PRC | 46,459 | - | 46,459 | |
Russia | 23,503 | 223 | 23,726 | |
69,962 | 223 | 70,185 | ||
Timing of revenue recognition | ||||
A point of time | 69,962 | - | 69,962 | |
Over time | - | 223 | 223 | |
69,962 | 223 | 70,185 | ||
17
Notes to the Condensed Consolidated Financial Statements (continued)
For the Six Months Ended 30 June 2019
4. SEGMENT INFORMATION
The following is an analysis of the Group's revenue and results by reportable and operating segments for the period under review:
Six months ended 30 June 2019 (unaudited)
Mine in | Mines in | |||||||
production | development | Engineering | Other | Total | ||||
US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | ||||
Revenue | ||||||||
External sales | 88,546 | - | 698 | - | 89,244 | |||
Segment revenue | 88,546 | - | 698 | - | 89,244 | |||
Site operating expenses and | ||||||||
service costs | (79,473) | (168) | (1,093) | (6) | (80,740) | |||
Site operating expenses and | ||||||||
service costs include: | ||||||||
Depreciation and amortisation | ||||||||
(see note 5(a)) | (14,610) | (140) | (66) | - | (14,816) | |||
Segment results | 9,073 | (168) | (395) | (6) | 8,504 | |||
(5,118) | ||||||||
General administrative expenses | ||||||||
General depreciation | (103) | |||||||
Other income, gains and losses | (5,012) | |||||||
Allowance for financial assets | ||||||||
measured at amortised cost | - | |||||||
Financial costs | (24,203) | |||||||
Loss before taxation | (25,932) | |||||||
18
Notes to the Condensed Consolidated Financial Statements (continued)
For the Six Months Ended 30 June 2019
4. SEGMENT INFORMATION (CONTINUED) Six months ended 30 June 2018 (unaudited)
Mine in | Mines in | ||||||
production | development | Engineering | Other | Total | |||
US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | |||
Revenue | |||||||
External sales | 69,962 | - | 223 | - | 70,185 | ||
Segment revenue | 69,962 | - | 223 | - | 70,185 | ||
Site operating expenses and | |||||||
service costs | (64,346) | (145) | (752) | (6) | (65,249) | ||
Site operating expenses and | |||||||
service costs include: | |||||||
Depreciation and amortisation | |||||||
(see note 5(a)) | (8,945) | (107) | (74) | - | (9,126) | ||
Segment results | 5,616 | (145) | (529) | (6) | 4,936 | ||
General administrative expenses | (5,229) | ||||||
General depreciation | (6) | ||||||
Other income, gains and losses | 2,976 | ||||||
Allowance for financial assets | |||||||
measured at amortised cost | (7,548) | ||||||
Financial costs | (10,430) | ||||||
Loss before taxation | (15,301) | ||||||
19
Notes to the Condensed Consolidated Financial Statements (continued)
For the Six Months Ended 30 June 2019
5. OPERATING EXPENSES
Six months ended 30 June | |||
2019 | 2018 | ||
US$'000 | US$'000 | ||
(unaudited) | (unaudited) | ||
Site operating expenses and service costs(a) | 80,740 | 65,249 | |
General administrative expenses(b) | 5,221 | 5,235 | |
85,961 | 70,484 | ||
(a) Site operating expenses and service costs | |||
Six months ended 30 June | |||
2019 | 2018 | ||
US$'000 | US$'000 | ||
(unaudited) | (unaudited) | ||
Subcontracted mining costs and engineering services | 24,941 | 13,604 | |
Railway tariff | 19,416 | 17,860 | |
Depreciation and amortisation | 13,114 | 9,126 | |
Depreciation of right-of-use assets | 1,702 | - | |
Staff costs | 9,355 | 9,985 | |
Materials usage | 6,537 | 5,803 | |
Electricity | 3,543 | 4,332 | |
Property tax | 2,909 | 3,336 | |
Other expense | 2,432 | 1,567 | |
Fuel | 1,090 | 1,139 | |
Professional fees* | 728 | 207 | |
Tax on extraction of mineral resources | 215 | - | |
Office costs | 176 | 195 | |
Lease expenses in respect of short-term leases and leases of low- | |||
value assets | 144 | 165 | |
Insurance | 65 | 79 | |
Bank charges | 59 | 54 | |
Business travel expenses | 21 | 18 | |
Mine development costs capitalised in property, | |||
plant and equipment | (930) | (791) | |
Movement in finished goods and work in progress | (4,777) | (1,430) | |
80,740 | 65,249 | ||
20
Notes to the Condensed Consolidated Financial Statements (continued)
For the Six Months Ended 30 June 2019
5. OPERATING EXPENSES (CONTINUED)
(b) General Administrative Expenses | |||
Six months ended 30 June | |||
2019 | 2018 | ||
US$'000 | US$'000 | ||
(unaudited) | (unaudited) | ||
Staff costs other than share-based payments | 2,984 | 2,246 | |
Professional fees* | 762 | 1,273 | |
Share-based payments | 737 | 1,112 | |
Business travel expenses | 213 | 165 | |
Office costs | 170 | 173 | |
Office rent | 133 | 118 | |
Depreciation | 103 | 6 | |
Bank charges | 58 | 97 | |
Insurance | 52 | 45 | |
Other expenses | 9 | - | |
5,221 | 5,235 | ||
- Professional fees comprise audit fees, legal fees, consulting fees, management services fees and engineering consultancy fees.
6. FINANCIAL COSTS
Six months ended 30 June | ||
2019 | 2018 | |
US$'000 | US$'000 | |
(unaudited) | (unaudited) | |
Interest expense on borrowings | 11,361 | 9,155 |
Finance expenses on early repayment of bank loan | 11,465 | - |
Interest expense on lease liabilities | 671 | - |
Unwinding of discount on environmental obligation and | ||
long-term construction costs payable | 706 | 1,275 |
24,203 | 10,430 |
21
Notes to the Condensed Consolidated Financial Statements (continued)
For the Six Months Ended 30 June 2019
7. INCOME TAX EXPENSE
Six months ended 30 June | ||
2019 | 2018 | |
US$'000 | US$'000 | |
(unaudited) | (unaudited) | |
Russia Corporate tax | (19) | (9) |
Hong Kong Profits tax | - | (29) |
Deferred tax credit (expense) | 727 | (298) |
708 | (336) |
Russia Corporate tax is calculated at a rate of 20% of the estimated assessable profit for each of the six months ended 30 June 2019 and 2018.
Based on the approved federal and regional laws in Russia, the K&S Project is considered to be an investment project and is exempted from Russia Corporate tax for the period from 2016 to 2021 and then, will be taxed at a reduced rate of 10% in the following 5 years increasing to 20% thereafter.
On 21 March 2018, the Hong Kong Legislative Council passed the Inland Revenue (Amendment) (No.7) Bill 2017 (the "Bill") which introduces the two-tiered profits tax rates regime. The Bill was signed into law on 28 March 2018 and was gazette on the following day. Under the two-tiered profits tax rates regime, the first HK$2,000,000 of assessable profits of the qualifying group entity will be taxed at 8.25%, and assessable profits above HK$2,000,000 will be taxed at 16.5%.
Hong Kong Profits Tax is calculated at 16.5% of the estimated assessable profit.
No tax from other jurisdictions has been recognised as the Group had no assessable profit arising in or derived from any other jurisdictions for the six months ended 30 June 2019 and 2018.
8. DIVIDENDS
No dividends were paid, declared or proposed to owners of the Company during both the six months ended 30 June 2019 and 2018.
22
Notes to the Condensed Consolidated Financial Statements (continued)
For the Six Months Ended 30 June 2019
9. LOSS PER SHARE
The calculation of basic and diluted loss per share attributable to owners of the Company is based on the following data:
Loss
Six months ended 30 June
20192018
US$'000 US$'000
(unaudited) (unaudited)
Loss for the purposes of basic and diluted loss per ordinary share | ||
being loss for the period attributable to owners of the Company | (25,204) | (15,619) |
Number of shares
Six months ended 30 June
20192018
Number Number
'000'000
Number of ordinary shares for the purposes of basic and | ||
diluted loss per ordinary share | 7,093,386 | 7,093,386 |
The computation of diluted loss per share for both periods ended 30 June 2019 and 2018 does not assume the exercise of share options granted by the Group because the exercise price of those options was higher than the average market price for the Company's shares.
23
Notes to the Condensed Consolidated Financial Statements (continued)
For the Six Months Ended 30 June 2019
-
MOVEMENTS IN EXPLORATION AND EVALUATION ASSETS, PROPERTY, PLANT AND EQUIPMENT AND RIGHT-OF-USE ASSETS
During the period, the Group spent approximately US$1.7 million (for the six months ended 30 June 2018: US$2.2 million) on the mine development and acquisition of property, plant and equipment.
The depreciation charge for the six months ended 30 June 2019 is approximately US$14,919,000 (for the six months ended 30 June 2018: US$9,132,000).
During the current interim period, the Group entered into new lease agreements for the use of bus and office for 3 years and 1.5 years respectively. The Group is required to make fixed monthly payments. On lease commencement, the Group recognised a right-of-use asset of US$343,000 and lease liability of US$343,000.
At 30 June 2019, the Group did not have any material contractual commitments for the acquisition of property, plant and equipment (31 December 2018: Nil). - TRADE AND OTHER RECEIVABLES
As at | As at | |
30 June | 31 December | |
2019 | 2018 | |
US$'000 | US$'000 | |
(unaudited) | (audited) | |
Trade receivables | 11,995 | 2,227 |
Unbilled receivables under engineering contracts | 302 | 204 |
Value-added tax recoverable | 402 | 3,762 |
Prepayments to suppliers | 3,534 | 2,867 |
Other debtors | 2,021 | 1,967 |
18,254 | 11,027 | |
Unbilled receivables under engineering contracts are expected to be billed and settled within one year and relate to long-term contracts in progress.
The Group allows an average credit period of 30 days to individual third party customers. Except for trade receivables measured at fair value through profit or loss, the Group applies the simplified approach in accordance to HKFRS 9 to measure expected credit loss ("ECL") which used a lifetime, the directors of the Company considered that the lifetime ECL allowance is insignificant as at 30 June 2019 and 31 December 2018.
24
Notes to the Condensed Consolidated Financial Statements (continued)
For the Six Months Ended 30 June 2019
11. TRADE AND OTHER RECEIVABLES (CONTINUED)
The following is an analysis of the trade receivables by age, presented based on the invoice date.
As at | As at | |
30 June | 31 December | |
2019 | 2018 | |
US$'000 | US$'000 | |
(unaudited) | (audited) | |
Less than one month | 11,943 | 2,222 |
One month to three months | 52 | 5 |
Total | 11,995 | 2,227 |
12. IMPAIRMENT ASSESSMENT ON FINANCIAL ASSETS AND OTHER ITEMS SUBJECT TO EXPECTED CREDIT LOSS ("ECL") MODEL
Six months ended 30 June | ||
2019 | 2018 | |
US$'000 | US$'000 | |
(unaudited) | (unaudited) | |
Impairment loss recognised in respect of | ||
trade receivables | - | 29 |
other receivables | - | 7,519 |
- | 7,548 | |
The basis of determining the inputs and assumptions and the estimation techniques used in the condensed consolidated financial statements for the six months ended 30 June 2019 are the same as those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2018.
25
Notes to the Condensed Consolidated Financial Statements (continued)
For the Six Months Ended 30 June 2019
13. TRADE AND OTHER PAYABLES
As at | As at | |
30 June | 31 December | |
2019 | 2018 | |
US$'000 | US$'000 | |
(unaudited) | (audited) | |
Trade payables | 9,000 | 8,188 |
Advances from customers | 151 | 229 |
Interest payables | 572 | 339 |
Construction cost payables | 22,351 | 13,182 |
Accruals and other payables | 31,391 | 32,850 |
63,465 | 54,788 | |
For individual third party trade creditors, the average credit period on purchase of goods and services for the period was 27 days (31 December 2018: 11 days).
The following is an aged analysis of the trade creditors based on invoice date. | ||
As at | As at | |
30 June | 31 December | |
2019 | 2018 | |
US$'000 | US$'000 | |
(unaudited) | (audited) | |
Less than one month | 5,556 | 6,058 |
One month to three months | 2,937 | 1,922 |
Over three months to six months | 353 | 131 |
Over six months | 154 | 77 |
Total | 9,000 | 8,188 |
26
Notes to the Condensed Consolidated Financial Statements (continued)
For the Six Months Ended 30 June 2019
14. BORROWINGS
As at | As at | |
30 June | 31 December | |
2019 | 2018 | |
US$'000 | US$'000 | |
(unaudited) | (audited) | |
Bank loans | ||
Gazprombank JSC | 231,758 | - |
Industrial and Commercial Bank of China ("ICBC") | - | 158,777 |
231,758 | 158,777 | |
Other loans | ||
EPC - Finance LLC | 65 | 63 |
CJSC Pokrovskiy Rudnik | - | 54,029 |
65 | 54,092 | |
Total | 231,823 | 212,869 |
Secured | 231,758 | 158,777 |
Unsecured | 65 | 54,092 |
231,823 | 212,869 | |
Carrying amounts repayable*: | ||
Within one year | 20,710 | 111,954 |
More than one year, but not exceeding two years | 20,348 | 44,886 |
More than two years, but not exceeding five years | 61,045 | 56,029 |
More than five years | 129,720 | - |
Total | 231,823 | 212,869 |
Presented as: | ||
Current liabilities | 20,710 | 111,954 |
Non-current liabilities | 211,113 | 100,915 |
231,823 | 212,869 |
* The amounts due are based on scheduled repayment dates set out in the loan agreements.
27
Notes to the Condensed Consolidated Financial Statements (continued)
For the Six Months Ended 30 June 2019
14. BORROWINGS (CONTINUED)
The Group is required to comply with certain restrictive financial covenants and undertaking requirements.
Bank loan from ICBC
The Group entered into a project finance facility agreement with ICBC (the "ICBC Facility Agreement") on 13 December 2010 pursuant to which ICBC would lend US$340,000,000 to LLC KS GOK, a subsidiary of the Group, to be used to fund the construction of the Group's mining operations, the K&S Project. The whole facility was originally repayable semi-annually in 16 instalments of US$21,250,000 each, starting from December 2014 and would be fully repayable by June 2022. On 27 February 2017, ICBC agreed to restructure two repayments originally due for payment on 20 June 2017 and 20 December 2017 in an aggregate amount of US$42,500,000 into five subsequent semi-annual repayment instalments. As a result, each of the repayment instalments due on 20 June 2018, 20 December 2018, 20 June 2019, 20 December 2019 and 20 June 2020 increased by US$8,500,000 to an amount equal to US$29,750,000.
On 19 March 2019, the Group repaid the outstanding loan principal and interest in full and terminated the ICBC Facility Agreement.
Bank loan from Gazprombank JSC
On 18 December 2018, the Group entered into two facility agreements for a loan in aggregate of US$240 million (the "Gazprombank Facility"). The Gazprombank Facility will mature in 2026 and consists of two tranches. The principal under the first tranche amounts to US$160 million with interest being charged at the London Inter-bank Offer Rate ("LIBOR") + 5.7% per annum and is repayable in equal quarterly payments during the term of the Gazprombank Facility, the final payment in December 2026. The principal under the second tranche amounts to US$80 million with interest being charged at LIBOR + 7.7% per annum and is repayable in full at the end of the term, in December 2026. Interest charged on the drawn down amounts under the two tranches is payable in equal quarterly payments during the term of the Gazprombank Facility.
On 19 March 2019, the Group drew down on the Gazprombank Facility to repay the bank loan from ICBC in full of approximately US$169 million and to finance the K&S Project's working capital of approximately US$3 million.
On 21 March 2019, the Group further drew down on the Gazprombank Facility to repay the loans from CJSC Pokrovskiy Rudnik in full of approximately US$57 million.
The remaining amounts of the Gazprombank Facility will be used for the following purposes: (i) to finance the K&S Project's working capital of approximately US$5 million and (ii) to repay part of the guarantee fee of approximately US$6 million owed by the Group to Petropavlovsk plc in respect of their guarantee of the ICBC Facility Arrangement.
As at 30 June 2019, the full facility amount of US$240 million has been fully drawn down.
The Gazprombank Facility is secured by i) a charge over the property, plant and equipment with net book value of US$28 million, ii) 100% equity share of Kapucius Services Limited in LLC KS GOK and iii) a guarantee from Petropavlovsk plc.
28
Notes to the Condensed Consolidated Financial Statements (continued)
For the Six Months Ended 30 June 2019
14. BORROWINGS (CONTINUED)
Bank loan from Gazprombank (Continued)
The drawn down of the Gazprombank Facility is subject to the following requirements:
- LLC KS GOK must maintain an authorised capital not less than RUB9.1 billion;
- the Group must provide quarterly reporting; and
- the LLC KS GOK must meet the following financial covenants:
- Net Debt/EBITDA ratio:
- For the periods ending on 30 June 2019 and 31 December 2019 of less than 6.5 times
- For the periods ending 30 June 2020 and 31 December 2020 of less than 5.0 times
- For the periods ending 30 June 2021 and 31 December 2021 of less than 3.5 times and,
- Starting from the period ending on 30 June 2022, of less than 3.0 times
- Debt Service Coverage Ratio (DSCR):
- For the periods ending on 30 June 2019 or 31 December 2019 - not less than 1.1 times
- Starting from the period ending on 30 June 2020 - not less than 1.2 times
Loan from EPC-Finance LLC
On 27 April 2018, LLC Petropavlovsk Iron Ore, a subsidiary of the Group, obtained an unsecured loan facility of RUB6,000,000 from EPC-Finance LLC, an independent third party. The loan carries interest of 11% per annum and is be repayable on 27 April 2020. As at 30 June 2019, RUB4,080,000 (equivalent to US$65,000) has been drawn down (31 December 2018: RUB4,080,000 (equivalent to US$63,000)).
Loans from CJSC Pokrovskiy Rudnik
On 13 June 2018, the Group obtained an unsecured short-term loan of RUB1,877,712,900 (equivalent to US$29,750,000) from CJSC Pokrovskiy Rudnik, a subsidiary of Petropavlovsk PLC. The loan carries interest of 12% per annum and is repayable on 21 March 2019.
On 18 December 2018, the Group obtained a second unsecured short-term loan of RUB1,798,712,000 (equivalent to US$27,000,000) from CJSC Pokrovskiy Rudnik. The loan carries interest of 16% per annum and was repayable on 21 March 2019.
On 21 March 2019, the Group repaid the outstanding loan principal and interest in full and terminated the credit facility.
29
Notes to the Condensed Consolidated Financial Statements (continued)
For the Six Months Ended 30 June 2019
15. OTHER FINANCIAL LIABILITIES
Current
As at | As at |
30 June | 31 December |
2019 | 2018 |
US$'000 | US$'000 |
(unaudited) | (audited) |
Other financial liabilities
Derivatives under hedge accounting
Cash flow hedges - Commodity Swap Contracts | (21,155) | - |
Cash flow hedges
At the end of the reporting period, the Group had the following commodity swap contracts designated as highly effective hedging instruments in order to manage the Group's iron ore price exposure in relation to iron ore forecast sales.
The fair value of commodity swap contracts at the end of the reporting period are provided by counterparty financial institutions.
During the period ended 30 June 2019, the loss on changes in fair values of the commodity swap contracts under cash flow hedges amounting to US$31,815,000 (six months ended 30 June 2018: gain on changes in fair values of US$2,026,000) has been recognised in other comprehensive income, and the fair value losses of the hedging instruments amounting to US$10,660,000 (six months ended 30 June 2018: nil) were reclassified from hedging reserve to profit or loss in the same period when the hedged item affects profit or loss upon the settlement.
16. SHARE CAPITAL
There were no movements in the issued share capital of the Company during the six months ended 30 June 2019 and 2018. Details of the share capital of the Company at 30 June 2019 and 31 December 2018 are as follows:
Number of | Share capital | |
shares | US$'000 | |
Issued and fully paid | ||
At 1 January 2019 and 30 June 2019 | 7,093,386,381 | 1,285,158 |
At 30 June 2019, the rights granted to Tiger Capital Fund to subscribe for a maximum of 60,000,000 new ordinary shares ("Option Shares") in December 2016 remained outstanding and expire in December 2021. No option shares granted were exercised or lapsed during the six months ended 30 June 2019.
30
Notes to the Condensed Consolidated Financial Statements (continued)
For the Six Months Ended 30 June 2019
17. RELATED PARTY DISCLOSURES
In addition to the transactions, balances and commitments disclosed elsewhere in this report, during the six months ended 30 June 2019, the Group entered into the following transactions with related parties:
Related parties
Petropavlovsk PLC, which is a substantial shareholder of the Company, and its subsidiaries are considered to be related parties.
As disclosed below, Petropavlovsk PLC, the Company and LLC KS GOK have entered into an agreement setting out the terms on which Petropavlovsk PLC provides a guarantee securing the Gazprombank Facility.
Trading transactions
Related party transactions the Group entered into that related to the day-to-day operation of the business are set out below.
Services provided(a) | Services received(b) | |||
Six months ended 30 June | Six months ended 30 June | |||
2019 | 2018 | 2019 | 2018 | |
US$'000 | US$'000 | US$'000 | US$'000 | |
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |
Petropavlovsk PLC and its subsidiaries | ||||
Petropavlovsk PLC | - | - | 690 | 2,091 |
LLC NPGF Regis | - | 1 | - | - |
CJSC Pokrovsky Rudnik | - | - | 1,804(c) | - |
Malomirsky Rudnik | - | 211 | - | - |
MC Petropavlovsk | 159 | 177 | 19 | 38 |
LLC Gidrometallurgia | 60 | 59 | - | - |
LLC BMRZ | - | - | 4 | - |
CJSC Pokrovskiy Rudnik | - | - | - | 167 |
- Amounts represent fee received/receivable from related parties for provision of helicopter services and administrative support.
- Amounts represent fee paid/payable to related parties for receipt of financial guarantee, administrative support, and interest payable/paid on short term loan.
- The amounts represent interest on loan borrowings from CJSC Pokrovsky Rudnik during the current interim period.
The related party transactions as disclosed above were conducted in accordance with terms mutually agreed with counter parties.
31
Notes to the Condensed Consolidated Financial Statements (continued)
For the Six Months Ended 30 June 2019
17. RELATED PARTY DISCLOSURES (CONTINUED) Trading transactions (Continued)
The outstanding balances with related parties at the end of the reporting period are set out below.
Amounts owed by | Amounts owed to | |||
related parties(a) | related parties(b) | |||
As at | As at | As at | As at | |
30 June | 31 December | 30 June | 31 December | |
2019 | 2018 | 2019 | 2018 | |
US$'000 | US$'000 | US$'000 | US$'000 | |
(unaudited) | (audited) | (unaudited) | (audited) | |
Petropavlovsk PLC and its subsidiaries | ||||
Petropavlovsk PLC | - | - | 5,026 | 10,336 |
OJSC Irgiredmet | - | - | 2 | 2 |
LLC NPGF Regis | 17 | 16 | 96 | 104 |
CJSC Albynsky Rudnik | 148 | 135 | - | - |
CJSC Pokrovskiy Rudnik | 180 | 163 | - | 54,076(c) |
Malomirsky Rudnik | 11 | 151 | - | - |
MC Petropavlovsk | 758 | 509 | 1,980 | 1,952 |
LLC Gidrometallurgia | 3 | - | - | - |
LLC BMRZ | - | - | 2 | - |
- The amounts are recorded in other receivables, which are unsecured, non-interest bearing and repayable on agreed terms within twelve months from the end of the reporting period.
- Other than the outstanding loan balance of US$54,029,000 due to CJSC Pokrovskiy Rudnik as described in note (c) below, the amounts are recorded in other payables, which are unsecured, non-interest bearing and repayable on agreed terms within twelve months from the end of the reporting period.
- The balance included a loan from CJSC Pokrovskiy Rudnik of US$54,029,000 at 31 December 2018.
Key Management Compensation
The remuneration of directors, which represent members of key management, during the period was as follows:
Six months ended 30 June | ||
2019 | 2018 | |
US$'000 | US$'000 | |
(unaudited) | (unaudited) | |
Short-term benefits | 1,062 | 1,050 |
Post-employment benefits | 45 | 57 |
Share-based payments | 185 | 491 |
1,292 | 1,598 | |
The remuneration of key management personnel is determined by the Remuneration Committee having regard to the performance of individuals and market trends.
32
RESULTS OF OPERATIONS
The following table summarises the consolidated results of the Group for the six months ended 30 June 2019 and 2018:
For the six months ended 30 June | |||
2019 | 2018 | Variance | |
Key Operating Data | |||
Iron Ore Concentrate | |||
- Production volume (wet metric tonnes) | 1,262,938 | 1,084,602 | 16.4% |
- Sales volume (wet metric tonnes) | 1,239,398 | 1,046,649 | 18.4% |
Average selling price (US$/tonne) | |||
- based on wet metric tonne^ | 71 | 67 | 6.0% |
- based on dry metric tonne^ | 77 | 73 | 5.5% |
Consolidated Income Statement (US$'000) | |||
Revenue | |||
Iron Ore Concentrate | 88,546 | 69,962 | 26.6% |
Engineering Services | 698 | 223 | >100% |
Total Revenue | 89,244 | 70,185 | 27.2% |
Site operating expenses and service costs before | |||
depreciation and amortisation | (65,924) | (56,123) | 17.5% |
General administration expenses before | |||
depreciation and amortisation | (5,118) | (5,229) | (2.1%) |
Depreciation and amortisation | (14,919) | (9,132) | 63.4% |
Other income, gains and losses | 508 | 1,713 | (70.3%) |
Foreign exchange (losses)/gains | (5,520) | 1,263 | N/A |
Write-off of unamortised loan costs | (11,465) | - | N/A |
Allowance for financial assets measured at | |||
amortised cost | - | (7,548) | N/A |
Other financial costs | (12,738) | (10,430) | 22.1% |
Loss before taxation | (25,932) | (15,301) | 69.5% |
Income tax credit/(expense) | 708 | (336) | (>100%) |
Loss after taxation | (25,224) | (15,637) | 61.3% |
Non-controlling interests | 20 | 18 | 11.1% |
Loss attributable to owners of the Company | (25,204) | (15,619) | 61.4% |
Underlying Results (US$'000) | |||
EBITDA | |||
- Mine in production | 23,683 | 14,561 | 62.6% |
- Group (excluding foreign exchange) | 18,684 | 10,503 | 77.9% |
- Group | 13,164 | 11,766 | 11.9% |
Loss attributable to owners of the Company, | |||
- excluding one-offnon-recurring items | (13,739) | (8,071) | 70.2% |
- excluding one-offnon-recurring | |||
items and foreign exchange | (8,219) | (9,334) | (11.9%) |
- If the average selling price is calculated based on dry metric tonne and, before taking into account the negative price variance of about US$9.3 per tonne due to hedging, average selling price was about US$86.5 per tonne for the six months ended 30 June 2019 (30 June 2018: US$74.5 per tonne).
33
THE UNDERLYING RESULTS OF THE GROUP
IRC's operating results are mainly derived from the operation of K&S. The Group manages its operations with principal reference to the underlying operating cash flows and recurring earnings.
EBITDA
EBITDA is a key performance indicator for IRC. For the first half of 2019, due to the higher sales revenue from the K&S mine, EBITDA of the mine in production segment increased by 62.6% to US$23.7 million. This is also reflected in the Group's EBITDA. If the foreign exchange movement is excluded, the Group's EBITDA improved by 77.9% from US$10.5 million in the first half of 2018 to US$18.7 million in 2019.
The Group's net EBITDA is, however, affected by foreign exchange change movements. The bridging loan from Petropavlovsk as well as the accruals and payables of the Group were mostly denominated in Russian Rouble and the appreciation of Rouble has given rise to foreign exchange losses. In the first half of 2019, we reported a foreign exchange loss of US$5.5 million while a gain of US$1.3 million was recorded in the same period last year. This US$6.8 million swing in foreign exchange, which is not within IRC's control, resulted in the group's 2019 EBITDA being only 11.9% higher than that of last year.
Loss attributable to owners of the Company - excluding one-offnon-recurring items
The Group's income statement sometimes includes certain material non-cash items which are non-operating and non- recurring in nature and should be considered separately.
The Group had an unamortised borrowing cost of US$11.5 million relating to the ICBC loan which was to be amortised. As the Group has refinanced the ICBC loan facility in the first half of 2019, this necessitated an accounting adjustment to fully write off this unamortised cost of in the statement of profit or loss in the first half of 2019, instead of amortising the cost over the remaining loan term. The write off does not have any cash impact on the Group.
In the first half of 2018, the Company had a net receivable from General Nice and, due to a winding up order being made by the High Court of Hong Kong against General Nice, it was unlikely that the Company would recover the receivable. Consequently, a one-off,non-cash provision of US$7.5 million was charged to the statement of profit or loss.
To facilitate a better understanding of the Group's operating results, the calculation of the Group's underlying results, which excludes the effect of the above items, is set out below:
For the six months ended 30 June | |||
US$'000 | 2019 | 2018 | Variance |
Loss attributable to owners of the Company | (25,204) | (15,619) | 61.4% |
Write-off of unamortised loan costs of ICBC loan | 11,465 | - | N/A |
Impairment provision for the receivable from | |||
General Nice | - | 7,548 | N/A |
Underlying loss for the period | (13,739) | (8,071) | 70.2% |
Foreign exchange | 5,520 | (1,263) | N/A |
Underlying loss for the period, excluding foreign | |||
exchange | (8,219) | (9,334) | (11.9%) |
34
The underlying loss of the Group amounted to US$13.7 million (30 June 2018: US$8.1 million). The higher loss figure was mainly due to the following:
- A greater foreign exchange loss, as explained above;
- Higher depreciation charge resulting from the reversal of asset impairments at the end of 2018; and
- Higher other financial costs due to the higher interest rates of the loans from Gazprombank and Petropavlovsk.
The effect of foreign exchange played a significant part in the underlying results. If the effect of foreign exchange, which is not within the control of IRC, is excluded, the underlying loss reduced by US$1.1 million to a loss of US$8.2 million. It is considered that this is a more accurate reflection of IRC's performance in the first half of 2019.
REVENUE
Iron ore concentrate
K&S mine is the main revenue contributor, accounting for most of IRC's revenue in the first half of 2019. The mine continues to increase sales and production volumes since the commencement of commercial production in 2017. The market continued to demonstrate good demand for high-grade iron ore during the reporting period. When comparing to the same period last year, the sales of iron ore concentrate from K&S increased by 18.4% to 1,239,398 tonnes.
The achieved selling price increased by 5.5% to US$77 per tonne on the dry metric tonne basis. This is arrived at after taking into account the effect of hedging. As part of the ongoing hedging program for risk management purposes, IRC considered it prudent to take advantage of the strong price environment. During the 6-month period, IRC entered into various hedging contracts to reduce the risks of adverse price movements. IRC's strategy is to hedge no more than half of K&S's production with the remaining volume left unhedged. The hedging instruments, mostly in the form of protective collars, would protect IRC from any significant reduction in iron ore price. Although IRC may not be able to fully capture the upside of the market price increase, as some of the protective hedging transactions were entered into before the price surge due to the Vale incident, hedging allows the Group to secure a comfortable level of profit and cashflow which are particularly important for a single-product company like IRC. If the effect of hedging is excluded, the achieved selling price on dry metric tonne basis would be US$86.5 per tonne. Under the accounting policy of IRC, the hedging instruments are subject to fair valuation adjustments with the gains or losses being reflected in reserve. As of 30 June 2019, the fair value loss of the hedging instruments amounted to US$21.2 million. As the market iron ore price softened after the 2019 interim end, the fair value loss reduced to approximately US$10 million as of the end of August 2019.
As a result of the increased sales volume and selling price, the revenue from K&S mine amounted to US$88.5 million in the first half of 2019, representing a 26.6% increase over the same period last year.
35
Engineering Services
Revenue from Giproruda, the small engineering services division of the Group, stably increased from US$223,000 to
US$698,000, representing increased billing.
SITE OPERATING EXPENSES AND SERVICE COSTS BEFORE DEPRECIATION AND AMORTISATION
Site operating expenses and service costs mainly represents the mining and operating expenses incurred by the Group's sole mine in production, the K&S operation, in respect of the sales of the iron ore concentrate. K&S commenced commercial production in 2017 and IRC started recognising its operating results in the income statement since the beginning of 2017. K&S is progressively conducting the ramp up progress for the plant in order to reach full production capacity level. As a result, there is an increase in site operating expenses and service costs to US$65.9 million in the first half of 2019 (30 June 2018: US$56.1 million) to match with the increased scale of operation. Despite increase in subcontracting mining costs and engineering services, resulting from higher stripping ratios and greater transportation distance as mining activities gradually expand to the outskirt of the pit, the 17.5% increase in cost is proportionately lower than the 18.4% increase in sales volume, reflecting the effect of IRC's stringent cost control.
The details of the key cash cost components of the iron ore concentrate sold are showed in the table below:
For the six months ended 30 June | |||
2019 | 2018 | ||
Cash cost | Cash cost | ||
Total cash cost | per tonne sold | per tonne sold | |
US$ million | US$/t | US$/t | |
Mining | 22.3 | 17.7 | 12.2 |
Processing | 13.3 | 10.6 | 11.6 |
Production overheads, site administration and | |||
related costs | 13.2 | 10.4 | 10.8 |
Transportation to customers | 19.4 | 15.7 | 18.2 |
Movements in inventories and finished goods | (5.7) | (4.5) | (1.1) |
Net cash cost | 62.5 | 49.9 | 51.7 |
The cash cost per tonne sold in the first half of 2019 decreased by 3.5% to US$49.9 despite a general inflation of 5.1% in Russia. Due to economy of scale on K&S's production, the processing and production overheads, site administration and related costs on a per-tonne basis reduced by 8.6% and 3.7% respectively. In addition, transportation cost to customers reduced by 13.7% to US$15.7/t. When the Amur River Bridge is operational, the transportation cost to customers in China could additionally save up to US$5 per tonne. The higher stripping ratio resulted in higher mining cost during the period, and this is in line with the mining plan. Towards the end of June 2019, the Russian Rouble slightly strengthened to close at RUB63 to the US dollar. Despite this small appreciation in June, over the first half of 2019, the currency generally remained weak. Russian Roubles depreciated to about RUB66 to the US dollar towards end of August 2019. While the Group's income is mainly US Dollars denominated and therefore unaffected by the weakness of Roubles, the Group's operating costs, which are mostly denominated in Roubles, would be reduced as Roubles depreciates.
36
The chart below shows the depreciation of the Roubles over the past 6 years:
USD/RUB Currency Chart (from July 2013 to Jun 2019)
Depreciation of Rouble improves operating margin
USD/RUB
95.00
85.00
75.00
RUB63
65.00 | ||||||||||||||||||||||||
55.00 | ||||||||||||||||||||||||
45.00 | ||||||||||||||||||||||||
35.00 | ||||||||||||||||||||||||
RUB33 | ||||||||||||||||||||||||
25.00 | Oct-13 | Jan-14 | Oct-14 | Jan-15 | Oct-15 | Jan-16 | Oct-16 | Jan-17 | Oct-17 | Jan-18 | Oct-18 | Jan-19 | Jul-19 | |||||||||||
Jul-13 | Apr-14 | Jul-14 | Apr-15 | Jul-15 | Apr-16 | Jul-16 | Apr-17 | Jul-17 | Apr-18 | Jul-18 | Apr-19 |
- Source: Bloomberg (as of 28 June 2019)
GENERAL ADMINISTRATION EXPENSES BEFORE DEPRECIATION AND AMORTISATION
Special attention continues to be paid to controlling administration costs. The successful implementation of the cost controls continued to provide benefits, with the Group's general administration expenses before depreciation and amortisation of US$5.1 million remained in line with that of last year despite inflation.
DEPRECIATION AND AMORTISATION
In previous years, due to volatility in the global economy and weakness in the commodity markets, significant asset impairments were made against the carrying value of K&S. In 2018, with the successful operation of the mine and the recovery of the market iron ore price, a reversal of asset impairment was made to reflect the increase in asset value. With a higher asset value resulting from the impairment reversal, depreciation charges in 2019 increased from US$9.1 million in the first half of 2018 to US$14.9 million in 2019.
SEGMENT INFORMATION
The mine in production segment, mainly represents the production and sales of the K&S mine, generated an EBITDA of US$23.7 million (30 June 2018: US$14.6 million), representing an increase of 62.6%. After taking into account the depreciation and amortisation charges, the segment reports a profit of US$9.1 million in the first half of 2019 (30 June 2018: US$5.6 million). The Kuranakh operation continues to be under care and maintenance and has no production during the period. The engineering segment recorded a loss of US$0.4 million due to higher operating cost.
FOREIGN EXCHANGE LOSS
The foreign exchange loss of US$5.5 million in 2019 was mainly attributable to the loss arising from the bridge loan from Petropavlovsk and other payables and accruals which were mostly Rouble denominated.
OTHER FINANCIAL COSTS
Other financial costs of US$12.7 million mainly represents the interest expenses on loans from ICBC, Gazprombank and Petropavlovsk. The increase in other financial costs was mainly due to the loans from Gazprombank and Petropavlovsk bearing higher interest rates.
37
INCOME TAX CREDIT
The income tax credit of US$0.7 million (30 June 2018 income tax expense: US$0.3 million) mainly represents the
deferred tax credit.
LOSS ATTRIBUTABLE TO THE OWNERS OF THE COMPANY
The improvement of the iron ore concentrate price and increasing production volume of K&S contributed to the positive operating results of the Group. However, due to the need to write off the unamortised loan cost of US$11.5 million, coupled with higher depreciation and other financial costs, the loss attributable to the owners of the company in the first half of 2019 amounted to US$25.2 million (2018: US$15.6 million).
CASH FLOW STATEMENT
The following table summaries the key cash flow items of the Group for the six months ended 30 June 2019 and 30 June 2018:
For the six months ended 30 June | ||
US$'000 | 2019 | 2018 |
Net cash generated from operations | 13,069 | 11,675 |
Interest paid | (10,138) | (5,656) |
Capital expenditure | (1,695) | (2,227) |
Taxes paid | (37) | (2,367) |
Proceeds and repayments of borrowings, net | 8,990 | (1,376) |
Loan guarantee and debt arrangement fees paid | (9,450) | - |
Other payments, lease liabilities and adjustments, net | (1,067) | (18) |
Net movement during the year | (328) | 31 |
Cash and bank balances (including time and restricted deposits) | ||
- At 1 January | 8,614 | 10,974 |
- At 30 June | 8,286 | 11,005 |
The net cash generated from operations amounted to US$13.1 million (30 June 2018: US$11.7 million), mainly due to increased cash inflow from the K&S mine. In line with the increase in the scope of operation and the higher selling price of iron ore, the accounts receivable balance also increased accordingly. The higher interest rates of the loans from Gazprombank and Petropavlovsk resulted in an increase in interest payment from US$5.7 million to US$10.1 million. Capital expenditure of US$1.7 million was incurred mainly by the K&S mine to support the ramping up of its production. Loan guarantee and debt arrangement fees paid mainly represent the settlement of guarantee fee due to Petropavlovsk and the arrangement fee incurred in relation to the Gazprombank facility.
LIQUIDITY, FINANCIAL AND CAPITAL RESOURCES
Share Capital
There were no changes in the share capital of the Company in the first half of 2019.
Cash Position and Capital Expenditure
As at 30 June 2019, the carrying amount of the Group's cash, deposits and bank balances was approximately US$8.3 million (31 December 2018: US$8.6 million).
38
Exploration, Development and Mining Production Activities
For the six months ended 30 June 2019, US$66.6 million (30 June 2018: US$57.4 million) was incurred on development and mining production activities. No exploration activity was carried out for the first half of 2019 and 2018. The following table details the capital and operating expenditures in the first half of 2019 and 2018:
For the six months ended 30 June | ||||||
2019 | 2018 | |||||
Operating | Capital | Operating | Capital | |||
US$'m | expenses | expenditure | Total | expenses | expenditure | Total |
K&S development | 64.9 | 1.5 | 66.4 | 55.4 | 1.9 | 57.3 |
Exploration projects and others | 0.0 | 0.2 | 0.2 | 0.1 | 0.0 | 0.1 |
64.9 | 1.7 | 66.6 | 55.5 | 1.9 | 57.4 |
The table below sets out the details of material new contracts and commitments entered into during first half of 2019 on a by-project basis. The amount was relatively small, reflecting the fact that the K&S mine is close to ramping up to full capacity.
For the six months ended 30 June | |||
US$'m | Nature | 2019 | 2018 |
K&S | Purchase of property, plant and equipment | - | 0.2 |
Sub - contracting for mining works | 0.9 | 0.5 | |
Sub - contracting for railway and related works | 0.2 | 0.8 | |
Others | Other contracts and commitments | 0.6 | 0.7 |
1.7 | 2.2 | ||
Borrowings and Charges
As at 30 June 2019, the Group had gross borrowings of US$234.8 million (31 December 2018: US$223.7 million), mainly represents the new long-term borrowing drawn from the Gazprombank loan facility. The Gazprombank loan facility is guaranteed by Petropavlovsk. The Group's weighted average interest rate was approximately 9.7% (30 June 2018: 6.6%) per annum.
As announced on 20 March 2019, the refinancing of the ICBC loan has been completed with a drawdown from Gazprombank loan facility on 19 March 2019. The proceeds from the Gazprombank facility has been applied in accordance with the intended use of proceeds to use as the working capital of K&S, full repayments of K&S's outstanding principal indebtedness under ICBC facility and loans from Petropavlovsk. The repayment schedule of the new facility with Gazprombank better aligns with the ramping up of K&S's production and should improve the cashflow position of the Group. This is reflected in the amount of borrowing due within one year, as the amount reduced from US$112.0 million as of the 2018 year end to US$20.7 million as of 30 June 2019.
Risk of Exchange Rate Fluctuation
The Group undertakes certain transactions denominated in foreign currencies, principally Russian Rouble and is therefore exposed to exchange rate risk associated with fluctuations in the relative values of US Dollars. Exchange rate risks are mitigated to the extent considered necessary by the Board of Directors, primarily through holding the relevant currencies. As of 30 June 2019, the Group does not undertake any material foreign currency transaction hedging.
39
Employees and Emolument Policies
As at 30 June 2019, the Group employed approximately 1,667 employees (31 December 2018: 1,698 employees). The
total staff costs excluding share-based payments was US$12.3 million in the reporting period. (30 June 2018: US$12.2 million). The emolument policy of the Group is set up by the Remuneration Committee on the basis of their merit, qualifications and competence with reference to market conditions and trends.
40
PROJECT REVIEW
K&S
100% owned
Trans Siberian Railway | ||||||||||||||||||||
China Railway | ||||||||||||||||||||
Amur River Bridge | ||||||||||||||||||||
ovesche | nsk | (under construction) | ||||||||||||||||||
Heihe | Birobidzhan | |||||||||||||||||||
Belogorsk | ||||||||||||||||||||
K&S | RUSSIA | |||||||||||||||||||
Heihe | ||||||||||||||||||||
Harbin | Shuangyash | an | ||||||||||||||||||
48º 59'04" (N) 131º 25'10" (E)
CHINA | |||||||
Izvestkovaya | |||||||
K&S | |||||||
Birobidzhan | |||||||
Khabarovsk |
Shuangyashan
OVERVIEW
The K&S Mine, 100% owned by IRC, is located in the Jewish Autonomous Region (EAO) of the Russian Far East. It is the second full-scale mining and processing operation that the Group has developed. The project consists of two principal deposits - Kimkan and Sutara. The K&S Phase I is to produce 3.2 million tonnes per annum of iron ore concentrate with 65% Fe grade. There is an option for a Phase II expansion to produce a total of 6.3 million tonnes of 65% iron ore concentrate per annum. As an interim development between the two phases, IRC is assessing an option to upgrade the Phase I production facility to increase the production capacity to about 4.6 million tonnes per annum with a capital expenditure requirement of about US$50 million. The Phase I Processing Plant has been constructed by CNEEC and funded through a project finance facility provided by ICBC. During March of 2019, IRC has completed refinancing of the ICBC loan with a loan facility from a Russian leading bank, Gazprombank. The principal repayment of the Gazprombank facility is skewed to the latter part of the loan term so that the repayment pattern will better align with the production plans of K&S.
K&S enjoys tremendous geographical advantage. The Trans - Siberian Railway is linked directly to the mine site, allowing easy transport of products to customers. With the usage of the Amur River Bridge which is expected to be completed and operational soon, the transportation cost and distance can be further reduced.
K&S is located in the Obluchenskoye District of the Jewish Autonomous Region (EAO) in the Russian Far East. The operation is 4 kilometres from the town of Izvestkovaya, through which the Trans-Siberian Railway passes. It is also 130 kilometres from the federal highway connecting to the regional capital of Birobidzhan, and 300 kilometres from Khabarovsk, the principal city of the Russian Far East.
41
K&S RAMP-UP PROGRESS ENTERING INTO FINAL PHASE
During the first half of 2019, K&S's ramp up programme continued and successfully managed several challenges, including taken proper mitigating measures on the issues of drying unit and gearbox in one of the crusher's feeder. In June, K&S broke its monthly production record by operating at an average capacity of 93%. K&S's mining contractors have been maintaining the work rates to ensure the sufficient supply of feedstock for K&S's increasing production volume. Although some additional ramping up issues have been revealed, K&S team is planning to resolve them quickly. Despite more ramping-up tests needing to be conducted, K&S's Processing Plant operated in a continuous manner at a steady production capacity of about 80% in the interim of 2019. With the well-experienced site team, IRC remains confident in resolving the outstanding issues to allow K&S to continue the increase in production volume. The current focus is to achieve designed capacity and catch up on previous deficits.
PRODUCTION
During the first half of 2019, 3,889,400 tonnes of ore was fed for primary processing and 2,652,538 tonnes of pre- concentrate was produced. Finally, 1,262,938 tonnes of iron ore concentrate was produced and 1,239,398 tonnes was sold.
SALES & MARKETING
As K&S is producing more iron ore concentrate, it has also successfully diversified its customer base by selling to customers in different countries and regions, including Russia and China. During the first half of 2019, apart from selling to its existing customers, K&S made trial shipments on CFR basis to customers in the more southern part of China. Despite having higher transportation cost, the achieved selling price was higher. It shows the Group's ability to supply to different geographical markets, as diversification of customers allows the Group to better manage transportation, marketing and pricing risks.
UNIT CASH COST
In view of the fact that K&S has not reached full production capacity, the unit cash cost per tonne in the first half of 2019 amounting to US$49.9 per tonne has not yet reached its optimal level. Taking into account the potential Rouble depreciation and the opening of the Amur River Bridge to reduce transportation costs, the Group considers that K&S's cash cost is expected to be further reduced when full scale operation at K&S is achieved.
SAFETY
The LTIFR is a measure of the number of lost-time injuries per one million hours worked. During the first half of 2019, the K&S's safety was well controlled with only one injury occurred at operation and the LTIFR was 1.45 (30 June 2018 LTIFR: zero).
MINING
The Kimkan operation covers approximately 50 km2 and comprises two key ore zones - Central and West. Open pit mining is carried out at the Central area, with ore being stockpiled for processing.
During the reporting period, the mining contractors had mined 4,766,300 tonnes of ore, drilled 276,358 metres and blasted 6,998,100 cubic metres at K&S. The mining contractors continue to replenish the stockpiles and prepare for the uplift in production volume in 2019.
42
AMUR RIVER BRIDGE/TONGJIANG BRIDGE
Amur River Bridge is a national project to build a railway bridge across the Amur River border between Russia and China. The Amur River Bridge was hailed as one of the major projects between the two countries. These infrastructure projects are expected to bring closer economic cooperation which IRC may benefit from.
According to the local media, in March 2019, the authorities of China's Heilongjiang province has confirmed the last steel beam of the Russian-Chinese railway bridge over Amur River has been installed. Russia has fully completed its engineer work on its side of the bridge. With China having completed the construction of its part in 2018, the main span of the bridge has been connected. The construction and installation of the related infrastructure works and border checkpoints are currently under way and the bridge is expected to be operational soon. The current distance from K&S to the Chinese border (Suifenhe) is approximately 1,000 kilometres. K&S mine is situated approximately 240 kilometres from the bridge site and IRC's nearest customer within China is approximately 180 kilometres away from the bridge. When the Bridge is operational, K&S will be able to reduce the transportation cost to the Chinese border by up to US$5 per tonne, allowing K&S to strengthen its position as a low-cost iron ore concentrate producer. Moreover, the Bridge will become a part of the new export route and stimulus for the creation of new logistical and industrial clusters, improving the transport accessibility of the region which K&S is expected to benefit indirectly.
43
Kuranakh
100% owned
RUSSIA | Trans Siberian | |||||||
Neryungri | ||||||||
Railway | ||||||||
BAM Railway | ||||||||
KURANAKH | ||||||||
China Railway |
KURANAK
chensk
Mogocha
Manzhouli
56º 41'35" (N) | |||||||||||||||||
170º 26'30" (E) | Chernyshe | h | i | ||||||||||||||
vsk | |||||||||||||||||
Chita | |||||||||||||||||
Blagoveshchensk | |||||||||||||||||
Nerchinsk | |||||||||||||||||
Heihe |
Manzhouli
OVERVIEW
CHINA
Kuranakh, 100% owned by IRC, is the Group's first mining operation and the first vertically integrated titano-magnetite operation in Russia, designed, built and managed by IRC. The mine was initiated in 2010 and moved to care and maintenance since beginning of 2016 due to challenging operating environment in the commodities market at that time.
The Kuranakh Mine is located in the Amur Region of the Russian Far East, near the town of Olekma, a principal stop on the BAM Railway. The operation covers an area of approximately 85 km2 and comprises the Kuranakh and Saikta open-pit mines, an on-site Crushing and Screening Plant and the nearby Olekma Processing Plant. The operation produces an iron ore concentrate with a 62.5% Fe quality content and an ilmenite concentrate with a 48% TiO2 quality content. The concentrates can be directly loaded onto railcar wagons for transportation via the BAM and Trans - Siberian Railways to customers in Russia and China and internationally via the Russian Pacific sea ports.
SAFETY
As the mine was moved into care and maintenance, there was no injuries and the LTIFR was zero during the first half of 2019 (30 June 2018 LTIFR: 0).
CONTINUED TO BE IN CARE & MAINTENANCE
Kuranakh has been moved to care and maintenance since the beginning of 2016 due to the softening of the iron ore market prices. Consequently, during the first half of 2019, there was no production or sales from Kuranakh operation. The only minimal costs recorded were for equipment maintenance and security. Although the subsidiary company that holds Kuranakh has applied for liquidation to save the ongoing costs, IRC retains the option of re-opening Kuranakh or pursuing other development alternatives if the metal markets upside prevails.
44
Garinskoye
99.6% owned
Magdag | achi | |||||||||
Trans Siberian | ||||||||||
Railway | ||||||||||
BAMRailway | ||||||||||
River Zeya | China Railway | |||||||||
Da Hinggan Ling | GARINSKOYE |
Heihe
52º 35'00" (N) 129º 65'30" (E)
RUSSIA
Belogorsk
CHINA
Ekaterinoslavka
Blagoveshchensk
Zavitinsk
Konstantinovka
OVERVIEW
Garinskoye, 99.6% owned by IRC, is an advanced exploration. The project offers the potential for a low-cost DSO- style operation, that can be transitioned into a large-scalelong-life open pit mining operation.
The project is located in the Amur Region of the Russian Far East, midway between the BAM and Trans-Siberian Railways. With exploration licences for ground covering an area of over 3,500 km2, the project is the largest in terms of area in the IRC portfolio.
CURRENT DEVELOPMENT
There are two possibilities to develop Garinskoye. The first option is to develop a large-scale 4.6 million tonne per annum open-pit operation with a life-of-mine of 20 plus years, which requires the construction of a rail connection. The second option is an intermediate DSO-style operation that does not require a rail connection and can be started up in advance of a larger conventional operation. The DSO-style plan comprises a pit with a 20.2 million tonnes reserve, 48% Fe grade, and a stripping ratio of 1.7:1 m3 per tonne. The DSO-style plan would then be able to produce
1.9 million tonnes per annum, with 55% grade iron ore fines and a life of operation of 8 years. There is an option to further increase the project value at very little additional capital expenditure with the addition of a further wet magnetic separation stage to produce a high-grade"super-concentrate" with a 68% iron ore content.
In 2013, IRC completed an internal Bankable Feasibility Study. In 2014, a third-party verification and a fatal flaws analysis for the DSO-style operation was carried out.
Currently, the Garinskoye project is placed on hold until the market conditions for iron ore improve.
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OTHER PROJECTS
Exploration Projects & Others
IRC's other exploration projects comprise an extensive portfolio that is diversified by geography, commodity and development stages. It aims to add value through the discovery of new resources and increasing and confirming mineable reserves. Currently, IRC is keeping these valuable licenses for later development until market conditions improve. Apart from exploration projects, IRC is also involved in complementary business of a steel slag reprocessing plant (SRP) and a mining consultancy services agency (Giproruda). Regarding the SRP project, as its feedstock was dependent on the concentrate from Kuranakh, and as the latter was moved to care and maintenance during 2016, it was moved to care and maintenance. Having successfully sourced feedstock from China, the SRP project with Jianlong Steel has recommenced operation in the first half of 2019. Below is a summary of the Group's current exploration projects portfolio:
Project | Products/Service | Location |
Kostenginskoye* (100% owned) | Iron ore concentrate | Jewish Autonomous Region, Russian Far East |
Bolshoi Seym (100% owned) | Ilmenite | Amur Region, Russian Far East |
SRP (46% owned) | Vanadium Pentoxide | Heilongjiang, China |
Giproruda (70% owned) | Technical mining research and | St. Peterburg, Russia |
consultancy services | ||
- Resource base for K&S
CORPORATE GOVERNANCE AND OTHER INFORMATION
Purchase, Sale or Redemption of the Company's Listed Securities
During the six months ended 30 June 2019, neither the Company nor any of its subsidiaries has purchased, sold or redeemed any of the Company's listed securities. As at 30 June 2019, the Company had not been notified of any short positions being held by any substantial shareholder in shares or underlying shares of the Company, which are required to be recorded in the register required to be kept under Section 336 of Part XV of the Securities and Futures Ordinance.
Corporate Governance and Other Information
The Management and Board of IRC are committed to promoting good corporate governance to safeguard the interests of the shareholders and to enhance the Group's performance. Detailed disclosure of the Company's corporate governance policies and practices is available in the 2018 Annual Report of the Company.
During the six months ended 30 June 2019, the Company has complied with the code provisions set out in the Corporate Governance Code as stated in Appendix 14 of the Rules Governing the Listing of Securities (the "Listing Rules") on The Stock Exchange of Hong Kong Limited except that the Independent Non-Executive Director, Mr. Simon Murray, CBE, Chevalier de la Légion d'Honneur was unable to attend the annual general meeting of the Company held on 19 June 2019 as provided for in code provision A.6.7 as he had overseas engagements. The Company has adopted the Model Code for Securities Transactions by Directors of Listed Issuers set out in Appendix 10 of the Listing Rules (the "Model Code"). The Company has made specific enquiry of all the Directors regarding any non-compliance with the Model Code during the period and they have confirmed their full compliance with the required standard set out in the Model Code. The Company has also adopted the Model Code as the Code for Securities Transactions by Relevant Employees to regulate dealings in securities of the Company by certain employees of the Company, or any of its subsidiaries and the holding companies who are considered to be likely in possession of unpublished price sensitive information in relation to the Company or its securities.
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Petropavlovsk is connected party of the Group and transactions with this entity during the six months ended 30 June 2019 are set out in note 17 to the condensed consolidated financial statements.
The 2019 interim results have been reviewed by the Audit Committee of the Company and by the external auditors.
Publication of Interim Results and Interim Report
This results announcement is published on the websites of The Stock Exchange of Hong Kong Limited (www.hkexnews.hk) and of the Company (www.ircgroup.com.hk). The interim report of the Company for the six months ended 30 June 2019 containing all the information required by the Listing Rules will be dispatched to the Company's shareholders and published on both websites on or before 30 September 2019.
By Order of the Board
IRC Limited
Yury Makarov
Chief Executive Officer
Hong Kong, People's Republic of China
Friday, 30 August 2019
As at the date of this announcement, the Executive Directors of the Company are Mr Yury Makarov and Mr Danila Kotlyarov. The Non-Executive Directors are Mr Peter Hambro, and Mr Chi Kin Cheng. The Independent Non-Executive Directors are Mr Daniel Bradshaw, Mr Chuang-Fei Li, Mr Simon Murray, CBE, Chevalier de la Legion d'Honneur, Mr Jonathan Martin Smith and Mr Raymond Kar Tung Woo.
IRC Limited
6H, 9 Queen's Road Central, Hong Kong
Tel: +852 2772 0007
Fax: +852 2772 0329
Email: ir@ircgroup.com.hk
Website: www.ircgroup.com.hk
For further information please visit www.ircgroup.com.hk or contact:
Kent Lo
Manager - Communications & Investor Relations
Telephone: +852 2772 0007
Mobile: +852 9688 8293
Email: kl@ircgroup.com.hk
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IRC Ltd. published this content on 30 August 2019 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 29 August 2019 23:40:03 UTC