Rana Gruber ASA

OSE:RANA

Earnings Call Transcript 2023-Q2

[Gunnar Moe, executive]

We have had a delay due to some technical issues. Sorry about that. My name is Gunnar Moe, and I am the CEO of Rana Gruber. With me today is our CFO, Erlend Høyen. [Operator Instructions].

We had a continued strong production with 427 metric tons iron ore concentrate. This is 9% more than in the second quarter of 2022. Cash costs per metric ton produced iron ore concentrate ended at NOK 498 equivalent to USD 46. The annual maintenance stock was successful and without any incident or damages. The adjustments we did during the maintenance stop enabled us to make significant progress on the Fe65 project. We look forward to seeing the results of these initiatives as we move through the autumn.

The deployment of the first electric machine in the underground mine was a success with high production efficiency and operational performance. We look forward to introducing more machines in the coming months. We continue to explore environmentally friendly technologies to become carbon-free before the end of 2025.

The financial results in the quarter were also good, and the Board of Directors decided to pay out dividends of NOK 2 per share. We have paid out 70% of the adjusted net profit as dividends in all of the 10 quarters since we became public. Once again, this confirms our ability to create value to our shareholders.

Now some words about HSE. I am happy to announce that we had no injuries during the second quarter. We have a continuous focus on safety. Currently, we have an ongoing risk assessment of electric machines together with DNV. This will make us prepared to operate the new electric machines that will replace the existing ones in order to achieve carbon-free production. Safety remains our top priority.

Now some words about the strategic development projects. After quarter end, [ Enova ] committed to providing support for 40% of the additional costs for electrical machines compared to fossil powered machines in the underground mine. This arrangement is based on today's prices for the relevant machines. The remainder of the investment costs will be covered by operational earnings and lease obligations. We are on track with the strategic projects and expect to become the world's first carbon-free iron ore producer before the end of [ '23]. Further updates on these projects will be given during the capital markets update in connection with the third quarter presentation 15th of November.

As mentioned, we had a continued strong production of iron ore concentrate, with 427 metric tons, up from 370,000 metric tons in the second quarter of 2022. The production increase was a result of higher activity in the Nordmalm area during the summer season to avoid costly production in the smaller pits during the winter season. This is expected to continue into the third quarter. The reason we produced less in the second quarter than in the preceding 3 quarters which you can see from the graph here on the left-hand side is the maintenance stop. The annual maintenance stop means that the second quarter typically has a slight decrease compared to the other quarters. We have previously said that we expected the high inventory in the first half of the year. But as one of our customers had to reduce its intake, we did not ship the expected volumes. Normalization of the inventory is, therefore, postponed, and we expect this to happen in the second half of the year.

I now leave the word to our CFO, Erlend Høyen, to take us through the financial results of the quarter.

[Erlend Høyen, executive]

Thank you, Gunnar. As Gunnar said earlier, cash cost per metric ton produced of iron ore concentrate ended at NOK 498. This is equivalent to USD 46. This is a stable level compared to last year, enabled by high production and continuous focus on cost efficiency. For those of you who are interested in a breakdown, you can see that the major cost driver is our mining operation followed by administration and processing. As you can see from the graph on the right-hand side, the revenues in the quarter came in at NOK 348.8 million, up from NOK 294.4 million last year. This represents an increase of 18.5%. The increase is due to several factors.

One is increased sales volumes. Another is higher mine site sales which you can see from the graph on the left-hand side. Besides that, a weaker Norwegian currency and reduced freight rates for shipments to Europe contributing the total revenues for the quarter. The operational profit ended at NOK 93.7 million, up from NOK 73 million last year. This increase is explained by the increased revenue and a positive change in inventory. The adjusted net profit ended at NOK 106.1 million, up from NOK 79.9 million last year. And this gives us an adjusted EBITDA EPS of NOK 2.86. And by continuing the 70% payout ratio, the Board decided to pay out a dividend of NOK 2.0 per share for the second quarter.

Let's finally have a little look at our cash flow and financial position. Total cash flow from operations ended at NOK 319 million. CapEx for the period was NOK 86.0 million. NOK 67.3 million of this was development CapEx, mainly related to development of the new mining level, level 91. The rest of the development CapEx was related to the Fe65 project as well as the new heating facility in the underground mine that will contribute to our zero-carbon emission project. The remaining NOK 18.7 million was maintenance CapEx.

NOK 106 million was payout of dividends for the first quarter and NOK 10 million was the down payment of lease liabilities. This gives us a total positive change in cash of NOK 117 million for the second quarter. After dividend distributions for the first quarter of '23, our equity ratio was 53.5%, and the total cash holdings at the end of the quarter was NOK 348 million. Those are all the details I had for the financial figures. But at a more general level, the for the time to come. Our continued focus on efficient operations enables a low financial leverage, which gives rise to a strong cash generation. This, again, makes it possible for us to fully fund CapEx through operations and to create value to our shareholders. We do expect to pay out solid dividends to our shareholders also in the future.

I will leave the word back to Gunnar for his final remarks.

[Gunnar Moe, executive]

Thank you, Erlend. And we have now given you an overview of the second quarter. To sum up, the quarter was characterized by continued high production volumes, no production-related injuries successful deployment of the first electric machine in the underground mine and dividends of NOK 2.0 per share. Allow me now to make some comments about the future. The long-term market outlook for iron ore remains positive. Expectations for stimulus in China's property market are supporting iron ore prices. but weak consumer confidence may delay a full recovery. For Rana Gruber, the future looks bright with a solid foundation of steady production, progress on strategic projects and strategic partnership with Cargill, we are confident in our ability to navigate the ever-changing landscape of the industry.

[Unknown Executive]

Yes. Thank you, Gunnar and Erlend. Now over to the Q&A. I will start with one question for, Gunnar. You pointed out that the maintenance stop impacts the production negatively. Why is it necessary to do a maintenance stop every year? And what does it consist then?

[Gunnar Moe, executive]

Annual maintenance stops are standard in the industry. We do maintenance work to secure cavity for the employees, but also to adjust the process to ensure operational efficiency, high and stable production and progress on the Fe65 project.

[Unknown Executive]

Yes. The next question goes to you, Erlend. Even with governmental funding from [ Enova ], your CapEx needs to replace fossil-driven machines with electric ones still seems to be significant. Will you be able to continue to pay out dividends while undertaking the necessary investments? Or will you need to choose between dividends and electrification?

[Erlend Høyen, executive]

We do expect to be able to do both. We are an old mining company with highly invested infrastructure, and that's also one of the rationales behind our dividend policy. And we have, during the 10 quarters that we have been public, we have been able to do both pay out dividends and do substantial investments. So we do not expect to have to choose between those two.

[Unknown Executive]

Can you also say something about the total cash cost that is higher than the previous quarter.

[Erlend Høyen, executive]

Yes. the total cash cost is higher, although the cash cost per [indiscernible] produce is equal. And that's mainly due to the increased cash related to our strategic projects and the development of those. We also have higher electricity prices and inflation in general. .

[Unknown Executive]

Yes. Next question. this goes to you, Gunnar. Do you have any updates about the Fe65 project?

[Gunnar Moe, executive]

At this moment, I can say that it's proceeding according to the plan. And as mentioned earlier, we will come with an updated information on the third quarter presentation in 15th of November.

[Unknown Executive]

Will you be able to replace all fossil-driven machines before the end of 2025.

[Gunnar Moe, executive]

At this time, we believe so. Everything is on track according to the plan, as mentioned before, and we will give more updates also on this and in the November presentation

[Unknown Executive]

Yes. If the European market continues on a weaker part, will you ship more vessels to China? And could you also say something about the reopening of China and effects on the iron ore prices?

[Gunnar Moe, executive]

The strategic partnership with Cargill gives us the opportunity to ship to China when Europe is struggling as it is at the moment. It's somewhat some of the producers in Europe are struggling a bit. So we can't rule out the possibility of shipping more vessels to China. Regarding the situation in China, it's very difficult to say, but mainly because of the difficulties in the real estate area. But we believe in the long term that there will be stimulus packages from the government that will support the production of steel and also that will give prices for iron ore that we will be sustainable for us.

[Unknown Executive]

Thank you. That was all the questions for today. .

[Gunnar Moe, executive]

Thank you, everyone.

[Erlend Høyen, executive]

Thank you, everyone.