Hong Kong Stock Exchange

Weak rouble and strong dollar are godsends for this Siberian iron ore miner selling to China

PUBLISHED : Wednesday, 18 April, 2018, 9:05pm
UPDATED : Wednesday, 18 April, 2018, 11:16pm

IRC, a China-backed East Siberia iron ore miner selling mostly to northeast China, will benefit from the weaker rouble in the wake of toughened sanctions by the Trump administration against Russia and its oligarchs, according to the company’s senior management. 

“As our operating costs are mostly denominated in Russian roubles, the recent deprecation in the currency helps lower our operating costs,” IRC’s chairman Jay Hambro said on Wednesday.

“More unit cost reduction would come from the ramp up of our Kimkanskoye and Sutarskoye mine’s capacity utilisation from 74 per cent currently to 100 per cent by the third quarter this year.” 

Hambro said capacity utilisation last year averaged 50 per cent.

When the Amur River bridge linking northeast China and East Siberia is completed before year-end as part of China’s Belt and Road Initiative, a further US$5 per tonne of logistics savings is expected, he added. 

IRC’s production cost was US$48.4 a tonne last year. Iron ore fetched around US$64.5 a tonne on Wednesday.

The rouble lost as much as 11 per cent of its value against the US dollar after Washington imposed additional sanctions, but it has since rebounded 4.5 per cent to around 61.7 against per dollar.

IRC, which had US$223 million of debt at the end of last year, is primarily funded by Industrial and Commercial Bank of China. 

Washington imposed fresh sanctions against Moscow on April 6, targeting seven Russian oligarchs with ties to President Vladimir Putin along with 12 companies they own or control, over alleged meddling in the 2016 US presidential election.

Russian iron ore miner IRC seeks more penalties from Chinese contractor for project delays

On Monday, the Trump administration said it would decide in the “near future” whether to impose additional sanctions over Moscow’s support for President Bashar al-Assad in civil war-torn Syria.

“We are aware of the global political and economic tensions of late … their impacts to [our Kimkanskoye and Sutarskoye mine] are not felt as the mine continues to sell … to customers in China and Russia as usual,” said chief executive Yury Makarov in a statement on Wednesday. 

Hambro said setbacks caused by railway congestion and “technical issues” last year that hampered its ore-drying facilities are not expected to recur this year.     

IRC has been seeking compensation from contractor China National Electric Engineering Co for missing its original commissioning date by more than two years. The dispute may take another 12 months to reach a conclusion, he added.  

IRC, the first company to list in Hong Kong in 2010 under the local bourse’s “Chapter 18” listing rules that allowed miners without revenue to list, posted an underlying operating loss of US$16.4 million for 2017 when it sold around 1.5 million tonnes of iron ore. 

Hambro said full utilisation of the mine’s 3.2 million tonne annual capacity is expected to be reached by year end, which will help lift IRC’s profitability.

But investors have yet to fully share his optimism amid uncertainties whether there will be more fallout from the US-Russia political and economic upheaval. 

On Wednesday in Hong Kong, IRC’s shares closed 4.7 per cent higher at 15.6 HK cents apiece. They have lost 12.4 per cent since April 6. 

Argonaut Securities analyst Helen Lau said investors have been reluctant to bet on Russia-exposed companies even as valuations have come down, due to uncertainties related to the deepening divide between Moscow and Washington.  

Still, IRC shares have been trending downwards in recent months, shedding two-thirds of their value in 14 months, even as iron ore prices have strengthened.

Among reasons for the disparity in the share price versus the improving business outlook, China Construction Bank has heavily sold down shares of the miner pledged as collateral for loans by General Nice Development, a customer and shareholder of IRC. 

General Nice Development, once China’s largest privately owned steel smelting materials trader, controlled by businessman Cai Suixin, owned 9.2 per cent of IRC in late March, down from a 13.8 per cent stake at the end of last year, according to IRC.