IRC Ltd. Bloomberg: 1029_HK Mining

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1 Thursday, January 3, Target Price HK$ Current Price HS$ Upside Potential 233% Rating: BUY Market Cap. Shares Outstanding HK$ Mn US$ 45.3 Mn 7,093.4 Mn Free Float (FF %) HK$ Mn /57% 52 Week Range (HK$) 0.255/ Avg. Daily Value HK$1.70Mn Hang Seng Index Level 25,042 Insider Holding % 43% P/E 1.8x (FY12/2020E) P/B 0.18x Risk: Above Average Analyst: Ajeya Patil ajeya@evaluateresearch.com Client Servicing: Pooja Burgul pooja@evaluateresearch.com IRC Ltd. Bloomberg: 1029_HK Mining Refinancing Facility from Gazprombank On 19 th December 2018 IRC announced that it has signed a loan facility agreement for US$240 mn with Gazprombank. This refinancing agreement has removed a major uncertainty regarding the company and will help IRC to repay in full its loan of US$169 mn under K&S s project finance facility with Industrial and Commercial Bank of China Ltd [ICBC]. Another important point to note is that the principal repayments of the Gazprombank loan facility are skewed to the latter part of the loan term and as such the repayment pattern aligns with the ramping up of K&S. The loan will mature in 2026 and it consists of two tranches. The principal under the first tranche of US$160 mn with interest being charged at 5.7% above LIBOR per annum is repayable in equal quarterly payments during the term of the loan. The principal under the second tranche of US$80 mn with interest being charged at 7.7% above LIBOR per annum is repayable at the end of the loan term. The Facility is expected to be drawn down in the first quarter of ICBC Loan waiver On 31 st December 2018, IRC also announced that ICBC has confirmed that all conditions precedent to the grant of the ICBC waivers have been fulfilled and the waivers are now effective. The waivers obtained include a waiver from the obligation of IRC to maintain the debt service reserve account until the earlier of, the date on which the security under the Project Finance Facility is released, and 21 March 2019 [both days inclusive]. Appointment of New Chairman The company has appointed Mr. Peter Charles Percival Hambro to serve as its Chairman and Non-Executive Director for a term of 3 years commencing on 19 December Mr Peter Charles Percival Hambro has been a director of a number of other public companies listed on the London Stock Exchange. He has more than 35 years of experience in the metals business. He was the deputy managing director of London-based bullion trader, Mocatta and Goldsmid Limited, and served on the Mocatta Group Executive Committee. In 1990, he formed Peter Hambro Limited, a boutique mining finance house, of which he remains Chairman, and became involved in mining with the acquisition of Mines d Or de Salsigne. In 1994, together with his business partner, Dr Pavel Maslovskiy, he founded Peter Hambro Mining PLC, now renamed Petropavlovsk PLC. Mr Peter Charles Percival Hambro is also a director of a number of unlisted family companies. 1

2 Mr George Jay Hambro has resigned as the Chairman of the Board and a Non-Executive Director of the Company with effect from 19 December Mr George Jay Hambro has decided his schedule does not allow for him to remain as Chairman of the Board but he will remain as a consultant of the company for a 12-month period. Amur River Bridge Set for Mid-2019 Completion The Amur River Bridge which has faced numerous delays in the past finally seems to be set for completion by mid As per media reports, the Chinese side of the bridge was successfully completed in mid-october while the Russian side is at its final stages of completion. The length of the bridge is 2,215 meters, of which the Chinese side is 1,886 meters. The bridge has a designed annual shipment volume of 21 mn tons. The bridge will have a significant positive impact on IRC s business as it will not only reduce the transportation cost of K&S by up to US$5 per ton but it can also alleviate the railway congestion problems in the region resulting in timely transport of cargo for K&S. Maintain Price Target; 233% Upside We maintain our price target of HK17 cents on the stock implying an upside of almost 233% on the current stock price. While there are a few challenges relating especially to the increasing level of inflation in Russia and increases in transportation costs, we believe that the company is well poised to grow in the long run with multiple catalysts in place to support strong revenue and earnings growth including: Successful production ramp-up at K&S mine. Amur River Bridge nearing completion which will positively impact IRC s costs. 65% iron ore produced at K&S expected to continue to trade at significant premium given China s pollution control measures. Refinancing of the ICBC loan facility. The stock is currently trading at a P/E of just 5.5x and 1.8x on our FY2019 and FY2020 earnings estimates vs. industry average multiples of 8.5x and 8.8x on consensus FY2019 and FY2020 earnings. Similarly, on a P/B basis, the stock is trading at just 0.18x vs. its own 5-year historical average multiple of 0.75x and industry average multiple of 1.12x. 2

3 5-Year Price Chart 3

4 Income Statement (US$ million) CY 2012 CY 2013 CY 2014 CY 2015 CY 2016 CY 2017 CY 2018E CY 2019E CY 2020E CY 2021E CY 2022E CAGR( ) Revenue % y/y 15.2% -23.9% -33.1% -79.9% 563.5% 42.1% 28.4% 11.1% 15.0% 12.5% Site operating expenses and service costs as a % of sales 101.6% 97.1% 120.9% 117.1% 150.6% 88.1% 87.4% 81.2% 77.5% 73.9% 70.0% General administration expenses as a % of sales 18.8% 11.8% 13.7% 12.4% 63.1% 9.0% 6.4% 5.4% 5.3% 5.1% 5.1% Operating Income (28.4) (14.3) (42.3) (24.1) (18.7) % y/y -49.6% 195.5% -43.0% -22.5% % 201.8% 178.3% 42.9% 40.5% 33.4% Operating margin (%) -20.4% -8.9% -34.6% -29.5% % 2.9% 6.2% 13.4% 17.2% 21.0% 24.9% Interest Expense Interest income interest rate 6.36% 1.86% 3.24% 0.84% 0.36% 3% 3% 3% 3% 3% Equity in (losses)income of affiliates Other recurring (expenses)/income Amortization of intangibles Goodwill impairment Other non-recurring (expenses) income Pretax Income (reported) y/y -17.8% 561.8% 63.5% -96.3% % % % 213.9% 67.5% 47.6% Pretax Income (adjusted) y/y -39.7% 177.8% -42.7% -35.2% -9.5% -49.7% % 213.5% 67.6% 47.6% - Income Tax Expense Effective tax rate (%) -0.3% -1.4% -1.9% 0.0% -1.7% -0.5% 0.0% 0.0% 0.0% 10.0% 15.0% - Minority Interests Income Before XO Items y/y -27.8% 664.5% 60.2% -96.4% % % % 213.9% 50.7% 39.4% - Extraordinary Loss Net of Tax Net Income (reported) y/y -27.8% 664.5% 60.2% -96.4% % % % 213.9% 50.7% 39.4% Exceptional (L)G Net Income (adjusted) y/y 80.5% 2.2% -50.4% -37.1% -10.0% -47.7% % 213.5% 50.8% 39.4% Basic EPS (reported) Basic EPS (adjusted) Basic Weighted Avg Shares 3, , , , , , , , , , , Diluted EPS (reported) y/y -40.3% 533.6% 44.0% -96.9% % % % 213.9% 50.7% 39.4% Diluted EPS (adjusted) y/y 49.3% -15.3% -55.4% -45.4% -21.7% -47.7% % 213.5% 50.8% 39.4% Diluted Weighted Avg Shares 3, , , , , , , , , , ,

5 Reference Items CY 2012 CY 2013 CY 2014 CY 2015 CY 2016 CY 2017 CY 2018E CY 2019E CY 2020E CY 2021E CY 2022E EBITDA Dividends per Share Dividend payout ratio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Dep & Amor as a % of sales 14.2% 13.1% 5.3% 0.8% 48.6% 13.4% 12.0% 10.8% 10.3% 9.8% 9.3% Balance Sheet (US$ million) CY 2012 CY 2013 CY 2014 CY 2015 CY 2016 CY 2017 CY 2018E CY 2019E CY 2020E CY 2021E CY 2022E Assets + Cash & Near Cash Items Short-Term Investments Accounts & Notes Receivable Inventories Other Current Assets Total Current Assets Long-Term Investments Gross Fixed Assets 1, , , , , , , , , , Accumulated Depreciation , , , , , , Net Fixed Assets Exploration and Evaluation Assets Other Long-Term Assets Goodwill & other Intangible Assets Total Long-Term Assets Total Assets , Liabilities & Shareholders' Equity + Accounts Payable Short-Term Borrowings Other Short-Term Liabilities Total Current Liabilities Long-Term Borrowings Provision for Close Down and Restoration Costs Construction Costs Payable Other Long-Term Liabilities Total Liabilities Total Preferred Equity Share Capital & APIC 1, , , , , , , , , , , Retained Earnings & Other Equity , , , , , , Total Shareholders' Equity Minority Interest Total Liabilities & Equity ,

6 Cash Flow (US$ million) CY 2012 CY 2013 CY 2014 CY 2015 CY 2016 CY 2017 CY 2018E CY 2019E CY 2020E CY 2021E CY 2022E + Profit before tax-cash Tax Paid Depreciation & Amortization Other Non-Cash Adjustments Changes in Working Capital Cash From Operating Activities Disposal of Fixed Assets Capital Expenditures Increase in Investments Decrease in Investments Other Investing Activities Cash From Investing Activities Dividends Paid Change in Short-Term Borrowings Increase in Long-Term Borrowing Decrease in Long-term Borrowing Increase in Capital Stocks Decrease in Capital Stocks Other Financing Activities Loan Guarantee Fee Paid Cash from Financing Activities Effect of Exchange Rate Changes Net Changes in Cash Opening cash Closing cash Ratio Analysis CY 2013 CY 2014 CY 2015 CY 2016 CY 2017 CY 2018E CY 2019E CY 2020E CY 2021E CY 2022E Growth Ratios % Revenue 15.2% -23.9% -33.1% -79.9% 563.5% 42.1% 28.4% 11.1% 15.0% 12.5% EBITDA % % -34.5% -54.3% % 58.9% 70.7% 26.2% 28.8% 25.0% Operating Income -49.6% 195.5% -43.0% -22.5% % 201.8% 178.3% 42.9% 40.5% 33.4% Net income reported -27.8% 664.5% 60.2% -96.4% % % % 213.9% 50.7% 39.4% Net income adjusted 80.5% 2.2% -50.4% -37.1% -10.0% -47.7% % 213.5% 50.8% 39.4% Diluted EPS reported -40.3% 533.6% 44.0% -96.9% % % % 213.9% 50.7% 39.4% Diluted EPS adjusted 49% -15% -55% -45% -22% -48% -193% 213% 51% 39% Accounts Receivables -14.6% -44.2% -2.0% -6.5% 6.7% -16.3% 33.6% 15.4% 19.2% 16.5% Inventory 28.5% -11.0% -39.9% -31.1% 40.5% 17.4% 25.2% 14.0% 16.4% 15.3% Fixed Assets 3.1% -24.5% -56.9% 67.1% 37.6% -2.6% -1.3% 0.9% 0.7% 1.4% Total Assets 14.4% -20.2% -51.9% 2.9% 26.2% 3.7% 3.5% 0.8% 3.5% 5.8% Accounts Payable -7.8% -32.9% 21.8% 19.1% 56.5% 19.0% 29.8% 8.8% 13.7% 12.5% Short Term Debt 175.0% 53.9% -16.5% 23.9% -7.3% 0.0% 0.0% 0.0% 0.0% 0.0% Long Term Debt 46.3% 29.2% 5.0% -17.7% -8.6% 18.5% 0.0% -13.0% -15.0% -17.6% Total Equity 11.2% -32.7% -79.3% 11.7% 88.1% -6.4% 3.4% 10.3% 14.0% 17.2% Cash From Operations 858.0% 328.5% -60.0% % % -62.3% 218.1% 62.6% 33.4% 28.5% Capital Expenditure -20.3% -11.1% -47.9% -72.0% -54.0% 3.0% 128.3% 66.7% 5.4% 17.6% Free Cash Flow -15.0% 12.3% -51.1% -79.1% % -92.2% 764.3% 56.1% 81.4% 39.3% 6

7 DCF model E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E (in US$ million) EBIT % growth 0% -50% 195% -43% -22% -117% 202% 178% 43% 40% 33% 12% 10% 6% 5% 4% -0.3% -1.4% -1.9% 0.0% -1.7% -0.5% 0.0% 0.0% 0.0% 10.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% EBIAT % growth 0% -49% 197% -44% -21% -117% 200% 178% 43% 26% 26% 12% 10% 6% 5% 4% + D&A Capital expenditures Change in net WC Free Cash Flow to Firm FCY y/y growth -20% 13% -54% -80% -189% 145% 7% 0% 35% 23% 22% 12% 8% 4% 5% Value per Share Cost of capital WACC 10.6% Terminal Growth 8.6% 9.6% 10.6% 11.6% 12.6% PV of Free Cash Flow % PV of Terminal Value % Add: Net Cash % Less: Non-Controlling Interest % Total Equity Value % Shares outstanding 7, DCF value 0.48 All Values are in mn US$ except stock price which is in HK$ 7

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